Question

How does investment in capital goods relate to a country's gross domestic product (GDP)?

Such investments usually decrease GDP by reducing profits for businesses in the country.


Such investments usually increase GDP by helping businesses produce goods faster and more efficiently.


Such investments usually decrease GDP by increasing the prices of most consumer goods.


Such investments usually increase GDP by increasing the skills and knowledge of the country's workforce.

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Answer 1

The correct choice is:

- "Such investments usually increase GDP by helping businesses produce goods faster and more efficiently."

Why: Purchases of capital goods (machinery, factories, equipment) are counted as investment (I) in the GDP identity GDP = C + I + G + (X − M), so they directly raise GDP when bought. Beyond that, capital goods raise firms' productive capacity and labor productivity, increasing output in the short and long run. (By contrast, spending on education is human-capital investment that raises skills; capital-goods investment does not directly raise workforce skills, nor does it generally reduce GDP by cutting profits or by raising consumer prices.)