National income accountants define investment to include
A. the purchase of common or preferred stock.
B. any increase in business inventories.
C. the purchase of any durable good, for example, an automobile or a refrigerator.
D. the addition of cash to a savings account.
The correct answer and explanation is:
The correct answer is B. any increase in business inventories.
National income accountants define investment as spending on capital goods that will help produce future goods and services. This concept is part of the measurement of gross domestic product (GDP), which includes the calculation of private investment. Investments include spending on structures, equipment, machinery, and inventory, as these are used to produce future output. However, the definition of investment excludes certain forms of spending, such as purchasing financial assets or durable consumer goods.
Option A, the purchase of common or preferred stock, is not considered an investment in the context of national income accounting. This is because buying stocks is a financial transaction and does not contribute directly to the production of goods and services. The purchase of stocks merely transfers ownership of an asset rather than contributing to future production.
Option C, the purchase of durable goods like automobiles or refrigerators, is also not included in national income accountants’ definition of investment. These goods are considered consumption items, not investment goods, as they are bought for personal use, not for the purpose of enhancing productive capacity.
Option D, the addition of cash to a savings account, represents a financial transaction and is not considered investment from the national income accounting perspective. Saving money in a bank does not directly contribute to future production unless it is lent out for productive purposes or invested in physical capital.
Option B, an increase in business inventories, is included as part of investment because it represents goods produced but not yet sold. When businesses increase their inventories, they are investing in goods that will eventually be sold and help generate future income. This type of investment is important for understanding economic activity, as it reflects the difference between current production and consumption.
In conclusion, national income accountants include an increase in business inventories as investment because it contributes to the economy’s future output, while the other options do not directly contribute to future production.