Question

Which one of these goes into the investment sector of GDP? \((\mathrm{LO} 2)\) a) The purchase of a new factory b) The purchase of 100 shares of Intel stock c) The purchase of a 10-year-old office building d) The purchase of a U.S. savings bond

Short answer

The purchase of a new factory (option a) goes into the investment sector of GDP, as it represents an investment in new capital goods.

Step-by-step solution

Understanding the investment sector of GDP

The investment sector of GDP includes all private spending on new capital goods, such as new factories, machinery, and equipment. It also includes spending on new residential construction and the change in inventory levels. The investment sector does not include purchases of financial instruments (like stocks and bonds) or purchases of existing assets (such as real estate or used machinery).

Analyzing the given options

Now let's analyze each option to see which one falls into the investment sector of GDP. a) The purchase of a new factory: This is an investment in new capital goods, as a factory is essential for production, and thus, it falls into the investment sector of GDP. b) The purchase of 100 shares of Intel stock: This is a financial transaction, not an investment in new capital goods, and so it does not fall in the investment sector of GDP. c) The purchase of a 10-year-old office building: This is an investment in an existing asset rather than new construction or new capital goods, and so it does not fall into the investment sector of GDP. d) The purchase of a U.S. savings bond: This is another financial transaction, not an investment in new capital goods, so it does not fall in the investment sector of GDP.

Conclusion

Out of the given options, the purchase of a new factory (option a) is the one that goes into the investment sector of GDP, as it represents an investment in new capital goods.

Key concepts

capital goods

Capital goods are key components in the production process. They include things like factories, machinery, and tools, which are used to produce other goods and services.
Unlike consumer goods, which are purchased for immediate consumption, capital goods are long-lasting and used over a period of time to generate economic output.

• Factories: These are important for creating various products and therefore considered significant investments.
• Machinery: Machines make production processes more efficient and can reduce labor costs in the long run.
• Equipment: This can include anything from computers to industrial ovens, all categorically seen as capital goods.

Investing in capital goods can lead to future growth, being part of the investment sector of GDP. It promotes greater productivity and technological advance.

financial instruments

Financial instruments are assets that can be traded, or they can also be viewed as packages of capital that may be traded. These include stocks, bonds, and securities, which represent financial transactions.

• Stocks: Buying stocks means purchasing a part of a company. It’s a form of investing in the company itself rather than new capital goods.
• Bonds: These are loans made to corporations or governments. When you purchase a bond, you're like a lender and expect your money back with interest eventually.

Although financial instruments are important for the economy and individual wealth building, they are not included in the GDP's investment sector. This is because they do not represent new production or spending on capital goods.

residential construction

Residential construction involves building new homes and apartments. It is a crucial part of economic growth and is included in the investment sector of GDP.

Here’s why it matters:

• New Homes: Investing in new houses increases the housing stock, benefiting the economy by providing living spaces and creating jobs in construction and related industries.
• Infrastructure: Residential construction often requires infrastructure development, like roads and utilities, boosting other sectors of the economy.

Such investments represent spending on long-lasting goods that fuel economic expansion and improve societal well-being. Hence, residential construction is a key contributor to the investment aspect of GDP.

inventory levels

Inventory levels refer to the amount of goods that businesses hold at any given time. Changes in inventory levels are an element of GDP investment.

Here's why they are important:

• Buffering Demand: They help companies meet short-term demand fluctuations without changing production levels drastically.
• Economic Indicator: Increasing inventory can indicate expected future sales, while decreasing inventory might suggest economic slowdown or decreased demand.

A change in inventory levels represents a form of investment because it reflects anticipated consumer demand. This has a direct role in the investment component of GDP as companies adjust their inventory to optimize supply chain efficiency and meet market needs.