A car manufacturing firm pays suppliers to install new machinery in a factory. Which of the following statements is true?

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BlackTom AI · Accepted Answer

To analyze the given scenario, first recall how GDP is measured in terms of spending components and what counts as investment.

Option a: 'This would be included in the investment component of GDP.' When a firm spends on purchasing capital equipment or machinery, this is considered gross private domestic investment. It reflects spending on new capital goods that will contribute to production in the future, so this option correctly assigns the transaction to the investment category in GDP.

Option b: 'This would be part of consumption expenditure and included.' Consumption expenditure covers spending by households on goods and services for current use, not on capital equipment for production. Since the expenditure is by a firm on machinery, it does not fit the definition of consumption, making this option incorrect.

Option c: 'This would not be included in the calculation of GDP.' Expenditures by firms on new capital goods are included in GDP as investment. Omitting this would ignore a fundamental component of national output. Therefore, this statement is false.

Option d: 'This would be included in GDP as an increase in firms’ inventories.' Inventory investment refers to changes in the stock of goods held for sale or for use in production that are not yet sold or used. Installing new machinery is a purchase of a capital asset, not an addition to inventory holdings, so this option is inaccurate.

In summary, the transaction aligns with the investment component of GDP rather than consumption, non-inclusion, or inventory accounting, with each incorrect option failing to match the fiscal treatment dictated by standard national accounting conventions.

MUF0062 Economics Unit 2 - Semester 2, 2025 Revision Quiz - GDP (10 - 15 minutes)

A car manufacturing firm pays suppliers to install new machinery in a factory. Which of the following statements is true?

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