Which of the following is included in “I” or investment in determining GDP?
Group of answer choices
A. the amount spent on new factories and machinery.
B. the amount spent on stocks and bonds.
C. the amount spent on consumer goods that last more than one year.
D. all of the above.
The correct answer and explanation is :
The correct answer is A. the amount spent on new factories and machinery.
Explanation:
In the context of calculating Gross Domestic Product (GDP), Investment (I) is one of the key components. GDP is typically calculated using the expenditure approach, which includes:
- Consumption (C): The spending by households on goods and services.
- Investment (I): The spending on capital goods that will be used for future production.
- Government spending (G): The spending by government on goods and services.
- Net Exports (NX): Exports minus imports.
Investment (I) in GDP includes the spending on goods and services that are used for future production and have a long-term productive value. Let’s break down the options:
- A. The amount spent on new factories and machinery: This is considered investment because it refers to the purchase of capital goods. Capital goods (such as factories, machinery, or equipment) are used in the production of goods and services over an extended period, thus contributing to future economic production. Investments in capital goods increase the productive capacity of an economy, and such purchases are included in GDP as part of investment spending.
- B. The amount spent on stocks and bonds: This is not included in investment for GDP calculation. While purchasing stocks and bonds involves spending money, it is not considered investment in the economic sense because it does not involve the creation of new goods or services. Instead, buying stocks and bonds is considered a transfer of ownership of existing financial assets, not an increase in productive capacity.
- C. The amount spent on consumer goods that last more than one year: This would be considered consumption (C), not investment (I). While durable goods such as cars and appliances are consumer goods, they are purchased for personal use, not for producing other goods and services. Therefore, such expenditures are part of consumption, not investment in the GDP framework.
Conclusion:
Investment in GDP includes spending on new factories, machinery, or any other capital goods that contribute to future production. Therefore, A is the correct answer, while options B and C do not qualify as part of the investment component in GDP.