Question

Classify the following items as a final good or service or an intermediate good or service and identify each item as a component of consumption expenditure, investment, or government expenditure on goods and services: \(\cdot\) Airline ticket bought by a student. \(\cdot\) New airplanes bought by Southwest Airlines. \(\cdot\) Cheese bought by Domino's. \(\cdot\) Your purchase of a new iPhone. \(\cdot\) New house bought by Bill Gates.

Short answer

Airline ticket: final service, consumption expenditure. New airplanes: intermediate good, investment. Cheese: intermediate good, production. New iPhone: final good, consumption expenditure. New house: final good, investment.

Step-by-step solution

Classify the Airline Ticket

The airline ticket bought by a student is considered a final service because it is the last step in the production chain and is consumed by the student. It falls under the category of consumption expenditure as the student is the final consumer.

Classify the New Airplanes

The new airplanes bought by Southwest Airlines are intermediate goods because they are used by the airline to provide transportation services. This purchase is considered an investment because Southwest Airlines is adding to its capital stock.

Classify the Cheese

The cheese bought by Domino's is an intermediate good since it is used as an ingredient in their pizzas. This is a part of the production process for Domino's, so it does not fall under consumption expenditure, investment, or government expenditure but is part of the production.

Classify the New iPhone

Your purchase of a new iPhone is a final good because it is bought for personal use and not for further production. It falls under consumption expenditure since you, as the consumer, are the final user.

Classify the New House

The new house bought by Bill Gates is a final good as it is used for personal living. This purchase is considered an investment because residential housing is treated as a form of investment in economics.

Key concepts

Consumption Expenditure

Consumption expenditure refers to the spending by households and individuals on goods and services. This is the most common type of expenditure in an economy. When you buy an airline ticket, a new iPhone, or a meal at a restaurant, you are engaging in consumption expenditure.
Consumption expenditure is crucial because it directly affects the overall demand in an economy. It includes:

• Durable goods like cars and appliances
• Non-durable goods like food and clothing
• Services such as travel, healthcare, and entertainment

For example, the airline ticket bought by a student is considered a final good and falls under this category because it is consumed by the student, providing a service directly to them.

Investment

Investment entails spending on goods that will be used for future production. It’s a key driver of economic growth as it increases the capacity of an economy to produce goods and services.
Investments can be:

• Business investments like machinery, equipment, and buildings
• Residential investments like new housing
• Changes in inventories

An example of investment is the purchase of new airplanes by Southwest Airlines. These airplanes are intermediate goods used in providing transportation services, meaning they're part of an airline's capital stock. Similarly, when Bill Gates buys a new house, this is also classified as investment because residential housing is treated as a form of investment in economics.

Government Expenditure

Government expenditure refers to the spending by the government on goods and services that are intended for public use or to support other functions of the government. This form of expenditure plays a vital role in shaping economic activities and ensuring public welfare.
Government expenditures include:

• Public services like education and healthcare
• Infrastructure projects like roads and bridges
• Defense and security

Unlike consumption expenditure, which is made by individuals, and investment, which is primarily for future production, government expenditure supports both current and future societal needs. Governments spend money for the collective benefit, impacting overall economic stability and growth.

Production Process

The production process involves transforming raw materials or components into finished goods. This is where intermediate goods come into play—items that are not intended for final consumption but will be used to produce other goods and services.
Examples include:

• Ingredients for food products
• Parts used in manufacturing
• Materials for construction

For instance, cheese bought by Domino's is an intermediate good as it is a vital part of making pizzas, which are then sold to consumers. The new airplanes purchased by Southwest Airlines also fall under this category, serving as crucial assets in their service production process. Intermediate goods are essential in ensuring the smooth flow of production, ultimately leading to the creation of final goods for consumption or investment.