Question

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

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


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 decrease GDP by reducing profits for businesses in the country.

Answer 1

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

Why: spending on capital goods (machines, equipment, buildings) raises a country's stock of physical capital. That makes firms more productive (produce more output per worker/hour), increases aggregate supply and output, and appears directly in GDP accounting as part of investment (I in Y = C + I + G + NX).

Why the others are wrong:
- Increasing skills/knowledge is human-capital investment (education, training), not the main effect of capital goods.
- Investment in capital goods does not generally decrease GDP by raising consumer prices.
- While investment can reduce short‑run profits (firms spend now), it normally raises future output and GDP rather than reducing it.