When an economy’s production capacity is expanding,
A. DI exceeds PI.
B. net exports is always a positive amount.
C. nominal GDP, but not necessarily real GDP, is rising.
D. gross domestic investment exceeds depreciation.
The correct answer and explanation is:
The correct answer is D. gross domestic investment exceeds depreciation.
When an economy’s production capacity is expanding, it means that there is more investment in capital goods, such as factories, machinery, and infrastructure, which allows the economy to produce more goods and services in the future. This expansion requires new investments to increase the productive capacity of the economy, and it is the increase in these investments that drives long-term growth.
Explanation:
- Gross Domestic Investment (GDI) refers to the total spending on new capital goods in an economy. These are the goods used to produce other goods and services. When an economy is growing, GDI increases, meaning businesses are investing more in physical capital. This investment is a key driver of economic expansion because it leads to greater production potential.
- Depreciation is the reduction in the value of capital goods over time due to wear and tear or obsolescence. In an economy where production capacity is expanding, the level of gross domestic investment exceeds depreciation, meaning that businesses are investing more in new capital than what is being used up by depreciation. This net addition to the capital stock leads to an increase in the economy’s productive capacity.
- Why not the other options?
- A. DI exceeds PI: DI (Disposable Income) exceeding PI (Personal Income) is not related to an economy’s expansion of production capacity. It typically reflects distributional aspects of income, which is not directly tied to the expansion of capital.
- B. Net exports are always a positive amount: The net export balance (exports minus imports) can fluctuate and is not necessarily positive during an expansion. Economic growth might coincide with greater imports due to higher domestic demand.
- C. Nominal GDP, but not necessarily real GDP, is rising: While nominal GDP might rise due to higher prices and increased production, real GDP adjusts for inflation and would only rise if there is a genuine increase in the quantity of goods and services produced. This is not a direct indicator of the expansion of the economy’s capacity.
In summary, when an economy’s production capacity is expanding, it is primarily driven by gross domestic investment outpacing depreciation, allowing for an increase in the economy’s potential output.