A GFCI receptacle can extend its protection to regular receptacles connected to the output side of the GFCI. Each actual GFCI receptacle should be directly connected to a breaker in electric panel.
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Just connect it back up like the outlet you are removing is connected. You should see a black and white wire and a ground wire.
code states that if a water source such as a sink is within 6 feet of a receptacle, that recetacle (s), must be protected by a GFCI receptacle. I believe the actual distance is 5 feet. Please forgive me if I'm wrong. But the NEC also requires that ANY counter top receptacles in a kitchen and receptacles ANYWHERE in a bathroom must be GFCI protected. More directly to your question, ordinary receptacles can be protected from a GFCI receptacle if properly wired. They are designed to do that. It is a way to save money. You may also consider a GFCI breaker if you have many receptacles to protect. I was told once that there is a limit of 3 "piggy backed" receptacles per GFCI but I have never seen that in the NEC.
Yes, you install a GFCI on a 2 wire circuit.
Most definitely. GFCI receptacles have a test buton, and should be tested regularly. you can also buy inexpensive plug-in testers at most home centers and electric supply houses.
No. In a 20 amp circuit all wire has to be 12 AWG or larger.
You need a GFCI outlet at any location that is within 6' of a water source. You also need a GFCI outlet in a room with a concrete floor, any garage, and any location outside the home or under the home in the crawl space. A GFCI outlet protects you from electrical shock near water or moisture. You can protect more than one outlet with 1 GFCI outlet. Connect the incoming power to the LINE side of the GFCI outlet and all the other outlets getting power from that outlet to the LOAD side of the GFCI outlet. That way they will all be protected by 1 GFCI. A GFCI breaker is used to protect an entire circuit and not just individual receptacles. It is often cheaper to use GFCI receptacles than a breaker, especially if "piggy-backed" such as described above. It is also more convenient to reset a GFCI receptacle than to reset a breaker. But your question is "why." From this I suspect you may be misunderstanding the difference between a breaker and GFCI protection. To keep things simple let me say that a GFCI does not work on the same principles as a standard breaker. It provides a much safer protection than a standard breaker. Even with a ground you need GFCI protection as listed above.