Are you sure of this example? It does look like GDP is 200k in both cases. The first case looks wrong, if he pulls 25k from his savings, there will be -25k in savings (or investments as they are the same) and +25k in spendings. Effect is 0...
The maid spends money in the first case, also. In the first case the money flows through a 25k expenditure that it doesn't flow through in the second case.
You are assuming that investments don't bring spending. But that is wrong. If the maid does not get the 25, a company, a bank, a fund, will get it (as savings=investments). This means the 25 will flow in the economy in both cases.
GDP is a first principles thing. It's designed to measure how much money is spent on consumption.
When the maid gets married, money is no longer spent on consuming her services, and that's the end of the story. Everything else is just accounting. In this example, the 25k of spending in the first case is counted one time extra because it passes through the maid on the way to some other saving or spending.
In the first case he has 175 of investments (I) and 25 of consume (C).
In the second case he has 200 of investments.
If some of the downvoters can please explain in those terms where I am wrong, it would be nice. Please, show me where the +25 come from in the 1st case.
Let's say the man invests all his money in a socks business. In the first case his socks business will demand 25k less. The maid will demand 25k more. I still see effect 0. I think the problem is people are not considering savings in the equation...
In the first scenario, the income of the man is 200K and the income of the woman is 25K. For a total income of 225K. It doesn't matter where the money comes from or is going. That's the income both will write on the federal returns or whatever you want, for the sake of the example.
When they get married, the man's income stays the same. The woman's income evaporates. She's not getting paid anymore. So their combined income is now 200K.
But the situation is exactly the same! The same amount of work is being done.
GDP works exactly the same way. It's an account of money flows, not production or actual economic activity.
Again, in the first case the man is simply spending the 25k on the maid. In the second case he will spend the 25k in something else. That something else will then spend the 25k as the maid would have done. No change.
Again, in the first case the man is simply spending the 25k on the maid. In the second case he will spend the 25k in something else.
Again, you are looking at the GDP of the man, not of the pair of people.
Because the man first spends 25k, and then the maid spends 25k again, the 25k is counted twice in GDP statistics. In the second case, it is counted once.
Well, let's say that now that he saves 25k for the maid, he hires a gardner. GDP 225 again? So basically the GDP depends on the number of transactions? Is that so?
