<p>GDP would not be zero in endowment economy in general. There are still prices and also interest rates, savings and investment in endowment economy. First, lets ignore other countries because foreign aid complicates GDP calculations (as Art pointed out if the endowment is foreign aid GDP would be zero). So lets suppose there is only one country, lets call it Arstotzka, which has an endowment economy (i.e. production is fully exogenously given).</p>

<p>A simple macro endowment model of economy would be the following.</p>

<p>There is one representative individual with following utility</p>

<p><span class="math-container">$$u = \sum^T_{t=1} u(C_t)$$</span></p>

<p>where <span class="math-container">$U$</span> is the utility, and <span class="math-container">$C_t$</span> is a consumption at time <span class="math-container">$t$</span>. Standard assumptions apply <span class="math-container">$U'(C_t)&gt; 0, U''(C_t)&lt; 0 $</span>, that is utility is increasing but at decreasing rate.</p>

<p>Now this will be an endowment economy so lets assume initial endowment of <span class="math-container">$A_0$</span> and additional per period endowment <span class="math-container">$Y_t$</span>. </p>

<p>Logically consumption must be equal or less the endowment, but rational consumers will always use up their whole resources (in this model there is no inheritance) so I can set it as an equality (this just simplifies the math):</p>

<p><span class="math-container">$$\sum^T_{t=1} C_t= A_0 + \sum^T_{t=1} Y_t$$</span></p>

<p>This problem gives us the following lagrangian:</p>

<p><span class="math-container">$$\mathcal{L} =  \sum^T_{t=1} u(C_t) + \lambda \left( A_0 + \sum^T_{t=1} Y_t - \sum^T_{t=1} C_t\right) $$</span></p>

<p>First order conditions are given by:</p>

<p><span class="math-container">$$u'(C_t) = \lambda \implies C_1 = C_2 = C_3 =... =C_T $$</span></p>

<p>This means that the consumption will be same in each period because marginal utility of consumption is constant.</p>

<p>Hence we know consumption will be <span class="math-container">$C_t = \frac{1}{T}\left( A_0 + \sum^T_{t=1} Y_t \right) $</span> </p>

<p>Furthermore, assuming no government and hence no public saving the saving is by definition just difference between endowment income and consumption at time <span class="math-container">$t$</span> <span class="math-container">$S_t = Y_t- C_t$</span></p>

<p>Now lets parametrize our model. </p>

<p>Lets suppose we only have two years <span class="math-container">$t=1,2$</span>. Next the initial endowment is set to 0\$ (to simplify calculations) and the per period endowments are <span class="math-container">$Y_1 = 60\$ $</span> and <span class="math-container">$Y_2= 40\$ $</span> </p>

<p>Hence consumption based on the above solution will be <span class="math-container">$C_1 = 50\$, C_2=50\$$</span> so in period 1 there is 10 dollars of savings and in period 2 10 dollars of dis-saving <span class="math-container">$S_1=10\$ $</span>  <span class="math-container">$S_2=-10\$ $</span>.</p>

<p>Now GDP using consumption approach would be in period 1 <span class="math-container">$Y = C + I + G = 50 + 10 + 0 = 60 $</span> (since <span class="math-container">$I=S$</span>  which is the same which you would get through the income approach as by our set up the endowment in <span class="math-container">$Y_t = 60\$ $</span>.</p>

<p>To sum it up GDP wont be zero because endowmends are income. In real life on a tax return it would be some windfall profit but regardless thats just semantics. In real life pure endowments dont exist so we dont really have a name for them in accounting formulas but the point of income approach is to add whole <strong>income</strong> of a nation regardless of how you call the source of income as long as it was produced withing borders of a country for GDP. For expenditure, approach you again just add all spending in an economy again regardless of the fact that spending was based on purchasing some some endowment output <span class="math-container">$Y_t$</span> or actually produced through some inputs.</p>

CC BY-SA 4.0
2020-01-01T14:38:28.470Z
You might have missed my point a bit. The endowment could have come from previous year's production. Either case, GDP for the time period when the economy has already been endowed would be zero.
Art
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2020-01-01T14:44:37.947Z
@Art i don’t think that’s correct think of pure endowments. Only one country in the world and the endowment is completely orthogonal on any input. This holds for all time periods. If endowments would be saved production from some endogenous process by definition they would cease to be endowments. Also that in the model would look like Y(L)=AL. Here I have just Y set to constant. As a matter of fact you can think of endowment as fully exogenous production. You have magic box that “produces” stuff
1muflon1
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2020-01-03T17:31:26.683Z
1."To sum it up GDP wont be zero because endowmends are income" Alas, but this is the only relevant point that I understood from your answer. 2. I don't see how it answers objection "Zero GDP because there is zero domestic production". Art seems to believe this point, so could you explain why Art is wrong?
KarmaPeasant
CC BY-SA 4.0
2020-01-03T18:40:04.823Z
@user161005 it’s because art though that the endowments in my example were some saved up production. In some economic models this can be the case but it’s not a necessity. A textbook definition of endowment is an output that is orthogonal on any input. Art would be completely correct if the endowments would be some past saving if you look at my formula using past saving/dissaving is being deducted from GDP through I if consumption would be 200 = C but it’s all from saving then investment I would have to be -200 and hence GDP=C+I=200-200=0
1muflon1
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2020-01-04T10:09:44.333Z
But how does it refute "GDP by definition measures domestic production, if there is no domestic production then there is no GDP"?
KarmaPeasant
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2020-01-04T11:47:03.773Z
that point was never disputed. The point endowments don’t mean nothing was produced domestically and there are still prices and savings as it only means all production is orthogonal inputs. So what art was saying was a special case. In most economic models using endowment economy there is not even a foreign sector. If a question is “is GDP in endowment economy 0”. I think it’s incorrect to say yes if that holds only in some **special** cases. That’s why my answer started GDP won’t be zero in **general**. It’s like asking do humans have 1 leg and saying yes because some people have only 1
1muflon1
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2020-01-04T12:35:04.643Z
Wait, how can there be any domestic production in a pure endowment economy?
KarmaPeasant
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2020-01-04T12:48:16.717Z
pure endowment economy is a theoretical concept at least on macro level. Imagine there is one country so the whole economy is pure endowment economy and there are no external sources of anything as in my answer, maybe whole world united into one country or all other countries got destroyed. Then imagine that in this country every year 1000$ worth of food appears because there is magical box that once a year gets filled with food. This satisfies the textbook definition of endowments. The food is being produced by the box, but production is orthogonal on any labor capital or land or other factor
1muflon1
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2020-01-06T16:22:08.517Z
@You convinced me that #1 and #3 in my post are wrong. But what about #2, i.e. the income approach? What part of the income formula would be positive?
KarmaPeasant
CC BY-SA 4.0
2020-01-06T16:43:15.007Z
@user161005 depending on the way how I would add goods market it could be in multiple ways the profit is the most ‘natural’ one for this example. To avoid expanding the above model mathematically, to save time, consider this intuition. Nobody says the box cannot be owned by some corporation that charges access to the box so in that case it would show up on the profit. Also anticipating the next question this would work because in this economy we can assume all consumers are owners of the corporation so all money gets recycled via dividends so that’s where people get money to buy the goods.
1muflon1
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2020-01-06T17:12:06.857Z
Thanks for you help, we did it! Although your answer is obscure, your comments revealed more accessible explanation. I summarized said explanation in "P.S." of my question. For your useful and informative comments I will accept your answer despite its obscurity.
KarmaPeasant
CC BY-SA 4.0
2020-01-06T17:14:27.470Z
@user161005 thanks, also i am sorry if the answer looked obscure, I did not intended that. Rather I wanted to be rigorous I did that on purpose because I think if I would only say that you should believe me that there is saving and consumption because I assume it is then it would be less believable. The above model is actually the famous permanent income hypothesis model. You will encounter it in your first or second year macro sooner or later.
1muflon1
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2020-01-10T02:55:58.240Z
Sorry but I disagree. If at the beginning of the year you're endowed with one pillow, no matter what you do with it (sell it, use it, etc.) if you produce nothing else then the GDP would still be zero (aside from, again, the value added you get (as a profit) from selling that pillow.
Art
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2020-01-10T06:49:10.780Z
@Art if that’s true then why would it show on accounts when applying GDP to classical endowment macro models? Here inside the model endowment is not any dissaving - saving and dissaving is done based on an endowment, so it’s not a saved up production. It’s also 1 country model so there are no external sources of production. I am not claiming such scenario can exist in a real world but theoretically you can have exogenous production and it’s still production. For example imagine that crops would not require any labor and would be exogenous on amount of land and capital would that mean they...
1muflon1
CC BY-SA 4.0
2020-01-10T06:54:04.783Z
... don’t count as production? Goods still have value independent of added value by act of selling. That’s going back to fallacious labor theory of value. Even in models with zero marginal costs goods have price and value. There is still scarcity in endowment economy and supply (although fixed by endowment) and demand. GDP measures production at current prices so there would still be GDP as you would measure the this exogenous production at current prices.
1muflon1
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2020-01-10T06:56:04.773Z
@1muflon1 Suppose you're endowed with 1 apple. You do nothing with it. You don't consume it, and it doesn't perish. What's your GDP in year 1? What about in year 2? Year 3?
Art
CC BY-SA 4.0
2020-01-10T07:31:02.080Z
@art yes in that specific example you are correct but I never made a claim that GDP in endowment economy can’t be zero. First sentence of my answer is that generally it won’t be zero. Even in real economy if every person decided that they never sell anything GDP will be zero no matter how high is the production. That’s the main criticism of GDP as a concept - it does not account for woman’s production at home etc. this example is just another specific example where GDP will be zero but if the apple is sold then GDP will be the price of the apple. Most endowment models still have markets
1muflon1
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2020-01-10T16:49:40.483Z
If I produce a car and it doesn't get sold, it would be counted as business inventory (investment) and GDP > 0. The next year, that car gets sold, GDP = 0 (investment -10, consumption +10) since nothing new was produced.
Art
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2020-01-10T16:52:43.590Z
This should be very fundamental, by the way. https://en.m.wikipedia.org/wiki/Inventory_investment I agree if we talk about a machine that endows the economy with some goods then we can debate whether we should count that. But if the good is already there then GDP = 0 regardless of whether it gets sold.
Art
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2020-01-10T16:56:22.567Z
@Art yes well but now you are changing the example if you get an apple endowment and you are an entrepreneur than it will also count as an inventory if it’s unsold. So you have to chose otherwise you compare apples and oranges. In real life when you create shelf at home it won’t get counted as inventory or consumption or anything the same with endowment of an apple if you are private person. If you have business then even if the inventory would just magically pop up you would put it in your inventory as in developed countries you can’t just sell something without accounting for it
1muflon1
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2020-01-10T17:00:17.890Z
@Art yes but again textbook definition of endowment is fully exogenous production or production orthogonal on inputs - definition of endowment is not something that was already owned. If an apple falls from tree and you are selling it (closest thing to endowment I can think of) it shows on GDP. If you already had the apple than I would call that past saving not endowment. Now I won’t dispute that in some micro models endowments are supposed to represent past savings since it’s just more convenient mathematically - hence where the confusion stems from- but that’s not their strict definition
1muflon1
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2020-01-10T17:07:21.157Z
I guess where we disagree is this: you think of endowment as some magical machine producing the endowment. That machine is in the economy, so the production should count towards GDP. I think of endowment as God's given goods. God shouldn't be counted as an economic agent. No production in the economy. GDP = 0. The difference is just God vs machine. So you agree?
Art
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2020-01-10T17:07:31.763Z
@Art no it’s without any labor producing them - that does not mean no production. It means production is orthogonal on labor for example Y(L)=10 would be example of endowment as well. In my answer I could just written Y(K,L,H,..)=60 and it would still be correct. Regardless even if OP would think that endowment means that there is not production but in economic literature and in many model it *does* represent production then should we just take OP definition or point out that in many economic models it actually does represent production?
1muflon1
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2020-01-10T17:09:39.060Z
@Art I think the disagreement is not just about that I would say that if the god resides within the economy (let’s say Zeus in Greece) than goods and services the god provides would still count as production - I think that our disagreement stems from not agreeing on definition of endowments - if I show you peer reviewed articles where endowments are defined as exogenous production will you consider it sufficient proof that it implies that if this production is sold or put into inventory it should be counted toward GDP?
1muflon1
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2020-01-10T17:10:01.407Z
In many intro courses, endowment economy is often motivated by some two guys on an island. On one side Robinson is endowed with two apples. On the other Friday is endowed with three bananas. They didn't produce these things. They were just given to them.
Art
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2020-01-10T17:10:47.290Z
Right. My point is that God doesn't reside within the economy.
Art
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2020-01-10T17:12:58.160Z
My final point before going to bed: if there's production then GDP > 0. If there's no production then GDP = 0. This is what I have in my answer ;)
Art
CC BY-SA 4.0
2020-01-10T17:14:25.697Z
@Art yes but these kind of bachelor level treatments are usually not very clear with definitions- when I explain endowments to students I also use examples like gifts - in that case GDP is zero, but that’s because it’s easier to explain endowments in this way than to unload some heavy theoretical concepts on freshmen
1muflon1
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2020-01-10T17:15:21.357Z
@Art I think your final point is a good point, I agree with it completely.
1muflon1
CC BY-SA 4.0
2020-01-01T13:54:04.373Z
2020-01-01T14:18:33.750Z
2020-01-01T14:18:33.750Z
1muflon1
<p>If you assume, as you have, that nothing is produced domestically, GDP, which stands for "gross domestic product" would be zero.</p>

<p>There is no economic activity, so there's no production, and GDP for that year would be zero. One could argue, of course, that there's value added involved in transportation, etc., but I think that's not what you're after.</p>

<p>To be more clear, you could put those endowed items as an "inventory" of a firm (counted as Investment in the expenditure approach). Consuming those endowed items would increase C or G, along with a negative investment to offset.</p>

CC BY-SA 4.0
2020-01-01T14:01:52.110Z
2020-01-01T14:01:52.110Z
Art
<p>(Am I correct?)</p>

<p>As far as I understand, a pure endowment economy means that good just appears in the country without any labor involved in producing them. Like maybe given country lives entirely from aid/gifts/tribute sent from abroad, literally producing nothing of its own (including services).</p>

<p>There are three ways that show that GDP=0</p>

<p>1.GDP stands for Gross <strong>Domestic Production</strong>. In a pure endowment economy there is <strong>no</strong> domestic production as such, <strong>thus GDP should be equal to zero</strong>.</p>

<p>2.We can try to calculate GDP using the income approach. This can result in negative GDP.</p>

<p>GDP=TNI+Sales taxes + Deprecation + NFFI</p>

<p>TNI=Wages + Rent + Interest + Profit</p>

<p>Wages=0 because nobody produces goods (including services!) inside the country.</p>

<p>Profit>=0. There is no profits domestically because nothing is produced domestically, but it's possible for local corporations to get profits aborad.</p>

<p>Interest>=0. Lending money is a service, but there are no local services in our economy, thus no lending to by local lenders to the citizens/firms of the country. But it's possible that local lenders lend their their money abroad.</p>

<p>Rent=0 because renting land is a local service and there are no local services (renting a building isn't an option because nobody builds anything in the country and it's not possible to sent a built building from abroad). So either nobody lends their land OR all lands are common property of all people living inside the country OR property rights over land don't exist as such</p>

<p>Thus TNI>=0. If TNI>0, then TNI+NFFI=0.</p>

<p>Sales Tax=0 because there is no State to collect taxes. And there is no State because any State provices services like the police, the army, the public healthcare, etc. The only way to not have all of these services, is to have NO entity with monopoly on violence, consequently making it impossible to collect taxes. </p>

<p>Deprecation=0 because businesses would have no capital to deprecate</p>

<p>NFFI=Income of foreigners earned here - Income our citizens earned abroad.</p>

<p>Income of foreigners earned here=0 because Wages,Rent,Interests,Profits=0 domestically (i.e. they can be >0 only if they get money from abroad)</p>

<p>Now it's possible that our citizens earned something abroad, in this case NFFI will become negative, but it will be compensated by equaly-sized positive TNI, <strong>consequently making the whole GDP equal to zero</strong>.</p>

<p>3.We can caclulate GDP using the expenditures approach.</p>

<p>GDP=Consumption+Investements+Government expenditures+Export-Import</p>

<p>Government expenditures=0 because there is no State.</p>

<p>Consumption=positive number because although there is nothing to buy on the national market it's possible to spend money on imported goods.</p>

<p>Investments=0 because there are no businesses and no new homes to be bought by households.</p>

<p>Export=0 because these are supposed to be goods produced in the country but sold aborad.</p>

<p>Import>0 if our citizens earn money abroad. In this case they can buy goods abroad too and then consume said goods inside the country. <strong>This coupled with positive "Consumption" will result in in GDP=0</strong></p>

<p>P.S. From what I read I concluded that the number 1 is incorrect because production of endowment, although happens somehow magically, without any labor of our workers (for an example, it's produced out of the thin air by a magic lamp) is still DOMESTIC production. </p>

<p>The number 2 is incorrect because it's possible to sell endowments to other citizens and get positive profit as the result  (i.e. domestic profit>0).</p>

<p>The number 3 is incorrect because other citizens would buy (domestically!) endowments owned by other citizens/firms. Thus at the least Consumption would be >0 for domestic goods.</p>

<macroeconomics><gdp><international-trade>
Would GDP for a pure endowment economy be equal to zero?
KarmaPeasant
# Would GDP for a pure endowment economy be equal to zero?

(Asked by: username_0 on 2020-01-01)

(Am I correct?)

As far as I understand, a pure endowment economy means that good just appears in the country without any labor involved in producing them. Like maybe given country lives entirely from aid/gifts/tribute sent from abroad, literally producing nothing of its own (including services).

There are three ways that show that GDP=0

1.GDP stands for Gross **Domestic Production**. In a pure endowment economy there is **no** domestic production as such, **thus GDP should be equal to zero**.

2.We can try to calculate GDP using the income approach. This can result in negative GDP.

GDP=TNI+Sales taxes + Deprecation + NFFI

TNI=Wages + Rent + Interest + Profit

Wages=0 because nobody produces goods (including services!) inside the country.

Profit>=0. There is no profits domestically because nothing is produced domestically, but it's possible for local corporations to get profits aborad.

Interest>=0. Lending money is a service, but there are no local services in our economy, thus no lending to by local lenders to the citizens/firms of the country. But it's possible that local lenders lend their their money abroad.

Rent=0 because renting land is a local service and there are no local services (renting a building isn't an option because nobody builds anything in the country and it's not possible to sent a built building from abroad). So either nobody lends their land OR all lands are common property of all people living inside the country OR property rights over land don't exist as such

Thus TNI>=0. If TNI>0, then TNI+NFFI=0.

Sales Tax=0 because there is no State to collect taxes. And there is no State because any State provices services like the police, the army, the public healthcare, etc. The only way to not have all of these services, is to have NO entity with monopoly on violence, consequently making it impossible to collect taxes.

Deprecation=0 because businesses would have no capital to deprecate

NFFI=Income of foreigners earned here - Income our citizens earned abroad.

Income of foreigners earned here=0 because Wages,Rent,Interests,Profits=0 domestically (i.e. they can be >0 only if they get money from abroad)

Now it's possible that our citizens earned something abroad, in this case NFFI will become negative, but it will be compensated by equaly-sized positive TNI, **consequently making the whole GDP equal to zero**.

3.We can caclulate GDP using the expenditures approach.

GDP=Consumption+Investements+Government expenditures+Export-Import

Government expenditures=0 because there is no State.

Consumption=positive number because although there is nothing to buy on the national market it's possible to spend money on imported goods.

Investments=0 because there are no businesses and no new homes to be bought by households.

Export=0 because these are supposed to be goods produced in the country but sold aborad.

Import>0 if our citizens earn money abroad. In this case they can buy goods abroad too and then consume said goods inside the country. **This coupled with positive "Consumption" will result in in GDP=0**

P.S. From what I read I concluded that the number 1 is incorrect because production of endowment, although happens somehow magically, without any labor of our workers (for an example, it's produced out of the thin air by a magic lamp) is still DOMESTIC production.

The number 2 is incorrect because it's possible to sell endowments to other citizens and get positive profit as the result (i.e. domestic profit>0).

The number 3 is incorrect because other citizens would buy (domestically!) endowments owned by other citizens/firms. Thus at the least Consumption would be >0 for domestic goods.

**Tags:** macroeconomics, gdp, international-trade


---

## 2 answers

### Answer by username_1 on 2020-01-01. Score: 0 | Accepted answer

GDP would not be zero in endowment economy in general. There are still prices and also interest rates, savings and investment in endowment economy. First, lets ignore other countries because foreign aid complicates GDP calculations (as Art pointed out if the endowment is foreign aid GDP would be zero). So lets suppose there is only one country, lets call it Arstotzka, which has an endowment economy (i.e. production is fully exogenously given).

A simple macro endowment model of economy would be the following.

There is one representative individual with following utility

$$u = \sum^T\_{t=1} u(C\_t)$$

where $U$ is the utility, and $C\_t$ is a consumption at time $t$. Standard assumptions apply $U'(C\_t)> 0, U''(C\_t)< 0 $, that is utility is increasing but at decreasing rate.

Now this will be an endowment economy so lets assume initial endowment of $A\_0$ and additional per period endowment $Y\_t$.

Logically consumption must be equal or less the endowment, but rational consumers will always use up their whole resources (in this model there is no inheritance) so I can set it as an equality (this just simplifies the math):

$$\sum^T\_{t=1} C\_t= A\_0 + \sum^T\_{t=1} Y\_t$$

This problem gives us the following lagrangian:

$$\mathcal{L} = \sum^T\_{t=1} u(C\_t) + \lambda \left( A\_0 + \sum^T\_{t=1} Y\_t - \sum^T\_{t=1} C\_t\right) $$

First order conditions are given by:

$$u'(C\_t) = \lambda \implies C\_1 = C\_2 = C\_3 =... =C\_T $$

This means that the consumption will be same in each period because marginal utility of consumption is constant.

Hence we know consumption will be $C\_t = \frac{1}{T}\left( A\_0 + \sum^T\_{t=1} Y\_t \right) $

Furthermore, assuming no government and hence no public saving the saving is by definition just difference between endowment income and consumption at time $t$ $S\_t = Y\_t- C\_t$

Now lets parametrize our model.

Lets suppose we only have two years $t=1,2$. Next the initial endowment is set to 0\$ (to simplify calculations) and the per period endowments are $Y\_1 = 60\$ $ and $Y\_2= 40\$ $

Hence consumption based on the above solution will be $C\_1 = 50\$, C\_2=50\$$ so in period 1 there is 10 dollars of savings and in period 2 10 dollars of dis-saving $S\_1=10\$ $ $S\_2=-10\$ $.

Now GDP using consumption approach would be in period 1 $Y = C + I + G = 50 + 10 + 0 = 60 $ (since $I=S$ which is the same which you would get through the income approach as by our set up the endowment in $Y\_t = 60\$ $.

To sum it up GDP wont be zero because endowmends are income. In real life on a tax return it would be some windfall profit but regardless thats just semantics. In real life pure endowments dont exist so we dont really have a name for them in accounting formulas but the point of income approach is to add whole **income** of a nation regardless of how you call the source of income as long as it was produced withing borders of a country for GDP. For expenditure, approach you again just add all spending in an economy again regardless of the fact that spending was based on purchasing some some endowment output $Y\_t$ or actually produced through some inputs.

> **Comments:**
> **username_2**: You might have missed my point a bit. The endowment could have come from previous year's production. Either case, GDP for the time period when the economy has already been endowed would be zero.  
> **username_1**: @username_2 i don’t think that’s correct think of pure endowments. Only one country in the world and the endowment is completely orthogonal on any input. This holds for all time periods. If endowments would be saved production from some endogenous process by definition they would cease to be endowments. Also that in the model would look like Y(L)=AL. Here I have just Y set to constant. As a matter of fact you can think of endowment as fully exogenous production. You have magic box that “produces” stuff  
> **username_0**: 1."To sum it up GDP wont be zero because endowmends are income" Alas, but this is the only relevant point that I understood from your answer. 2. I don't see how it answers objection "Zero GDP because there is zero domestic production". Art seems to believe this point, so could you explain why Art is wrong?  
> **username_1**: @user161005 it’s because art though that the endowments in my example were some saved up production. In some economic models this can be the case but it’s not a necessity. A textbook definition of endowment is an output that is orthogonal on any input. Art would be completely correct if the endowments would be some past saving if you look at my formula using past saving/dissaving is being deducted from GDP through I if consumption would be 200 = C but it’s all from saving then investment I would have to be -200 and hence GDP=C+I=200-200=0  
> **username_0**: But how does it refute "GDP by definition measures domestic production, if there is no domestic production then there is no GDP"?  
> **username_1**: that point was never disputed. The point endowments don’t mean nothing was produced domestically and there are still prices and savings as it only means all production is orthogonal inputs. So what art was saying was a special case. In most economic models using endowment economy there is not even a foreign sector. If a question is “is GDP in endowment economy 0”. I think it’s incorrect to say yes if that holds only in some **special** cases. That’s why my answer started GDP won’t be zero in **general**. It’s like asking do humans have 1 leg and saying yes because some people have only 1  
> **username_0**: Wait, how can there be any domestic production in a pure endowment economy?  
> **username_1**: pure endowment economy is a theoretical concept at least on macro level. Imagine there is one country so the whole economy is pure endowment economy and there are no external sources of anything as in my answer, maybe whole world united into one country or all other countries got destroyed. Then imagine that in this country every year 1000$ worth of food appears because there is magical box that once a year gets filled with food. This satisfies the textbook definition of endowments. The food is being produced by the box, but production is orthogonal on any labor capital or land or other factor  
> **username_0**: @You convinced me that #1 and #3 in my post are wrong. But what about #2, i.e. the income approach? What part of the income formula would be positive?  
> **username_1**: @user161005 depending on the way how I would add goods market it could be in multiple ways the profit is the most ‘natural’ one for this example. To avoid expanding the above model mathematically, to save time, consider this intuition. Nobody says the box cannot be owned by some corporation that charges access to the box so in that case it would show up on the profit. Also anticipating the next question this would work because in this economy we can assume all consumers are owners of the corporation so all money gets recycled via dividends so that’s where people get money to buy the goods.  
> **username_0**: Thanks for you help, we did it! Although your answer is obscure, your comments revealed more accessible explanation. I summarized said explanation in "P.S." of my question. For your useful and informative comments I will accept your answer despite its obscurity.  
> **username_1**: @user161005 thanks, also i am sorry if the answer looked obscure, I did not intended that. Rather I wanted to be rigorous I did that on purpose because I think if I would only say that you should believe me that there is saving and consumption because I assume it is then it would be less believable. The above model is actually the famous permanent income hypothesis model. You will encounter it in your first or second year macro sooner or later.  
> **username_2**: Sorry but I disagree. If at the beginning of the year you're endowed with one pillow, no matter what you do with it (sell it, use it, etc.) if you produce nothing else then the GDP would still be zero (aside from, again, the value added you get (as a profit) from selling that pillow.  
> **username_1**: @username_2 if that’s true then why would it show on accounts when applying GDP to classical endowment macro models? Here inside the model endowment is not any dissaving - saving and dissaving is done based on an endowment, so it’s not a saved up production. It’s also 1 country model so there are no external sources of production. I am not claiming such scenario can exist in a real world but theoretically you can have exogenous production and it’s still production. For example imagine that crops would not require any labor and would be exogenous on amount of land and capital would that mean they...  
> **username_1**: ... don’t count as production? Goods still have value independent of added value by act of selling. That’s going back to fallacious labor theory of value. Even in models with zero marginal costs goods have price and value. There is still scarcity in endowment economy and supply (although fixed by endowment) and demand. GDP measures production at current prices so there would still be GDP as you would measure the this exogenous production at current prices.  
> **username_2**: @username_1 Suppose you're endowed with 1 apple. You do nothing with it. You don't consume it, and it doesn't perish. What's your GDP in year 1? What about in year 2? Year 3?  
> **username_1**: @art yes in that specific example you are correct but I never made a claim that GDP in endowment economy can’t be zero. First sentence of my answer is that generally it won’t be zero. Even in real economy if every person decided that they never sell anything GDP will be zero no matter how high is the production. That’s the main criticism of GDP as a concept - it does not account for woman’s production at home etc. this example is just another specific example where GDP will be zero but if the apple is sold then GDP will be the price of the apple. Most endowment models still have markets  
> **username_2**: If I produce a car and it doesn't get sold, it would be counted as business inventory (investment) and GDP > 0. The next year, that car gets sold, GDP = 0 (investment -10, consumption +10) since nothing new was produced.  
> **username_2**: This should be very fundamental, by the way. https://en.m.wikipedia.org/wiki/Inventory_investment I agree if we talk about a machine that endows the economy with some goods then we can debate whether we should count that. But if the good is already there then GDP = 0 regardless of whether it gets sold.  
> **username_1**: @username_2 yes well but now you are changing the example if you get an apple endowment and you are an entrepreneur than it will also count as an inventory if it’s unsold. So you have to chose otherwise you compare apples and oranges. In real life when you create shelf at home it won’t get counted as inventory or consumption or anything the same with endowment of an apple if you are private person. If you have business then even if the inventory would just magically pop up you would put it in your inventory as in developed countries you can’t just sell something without accounting for it  
> **username_1**: @username_2 yes but again textbook definition of endowment is fully exogenous production or production orthogonal on inputs - definition of endowment is not something that was already owned. If an apple falls from tree and you are selling it (closest thing to endowment I can think of) it shows on GDP. If you already had the apple than I would call that past saving not endowment. Now I won’t dispute that in some micro models endowments are supposed to represent past savings since it’s just more convenient mathematically - hence where the confusion stems from- but that’s not their strict definition  
> **username_2**: I guess where we disagree is this: you think of endowment as some magical machine producing the endowment. That machine is in the economy, so the production should count towards GDP. I think of endowment as God's given goods. God shouldn't be counted as an economic agent. No production in the economy. GDP = 0. The difference is just God vs machine. So you agree?  
> **username_1**: @username_2 no it’s without any labor producing them - that does not mean no production. It means production is orthogonal on labor for example Y(L)=10 would be example of endowment as well. In my answer I could just written Y(K,L,H,..)=60 and it would still be correct. Regardless even if OP would think that endowment means that there is not production but in economic literature and in many model it *does* represent production then should we just take OP definition or point out that in many economic models it actually does represent production?  
> **username_1**: @username_2 I think the disagreement is not just about that I would say that if the god resides within the economy (let’s say Zeus in Greece) than goods and services the god provides would still count as production - I think that our disagreement stems from not agreeing on definition of endowments - if I show you peer reviewed articles where endowments are defined as exogenous production will you consider it sufficient proof that it implies that if this production is sold or put into inventory it should be counted toward GDP?  
> **username_2**: In many intro courses, endowment economy is often motivated by some two guys on an island. On one side Robinson is endowed with two apples. On the other Friday is endowed with three bananas. They didn't produce these things. They were just given to them.  
> **username_2**: Right. My point is that God doesn't reside within the economy.  
> **username_2**: My final point before going to bed: if there's production then GDP > 0. If there's no production then GDP = 0. This is what I have in my answer ;)  
> **username_1**: @username_2 yes but these kind of bachelor level treatments are usually not very clear with definitions- when I explain endowments to students I also use examples like gifts - in that case GDP is zero, but that’s because it’s easier to explain endowments in this way than to unload some heavy theoretical concepts on freshmen  
> **username_1**: @username_2 I think your final point is a good point, I agree with it completely.  

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### Answer by username_2 on 2020-01-01. Score: 1

If you assume, as you have, that nothing is produced domestically, GDP, which stands for "gross domestic product" would be zero.

There is no economic activity, so there's no production, and GDP for that year would be zero. One could argue, of course, that there's value added involved in transportation, etc., but I think that's not what you're after.

To be more clear, you could put those endowed items as an "inventory" of a firm (counted as Investment in the expenditure approach). Consuming those endowed items would increase C or G, along with a negative investment to offset.


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