Identify the component of aggregate expenditure (C for Consumption, I for Invest
ID: 1139092 • Letter: I
Question
Identify the component of aggregate expenditure (C for Consumption, I for Investment, G for Government Purchases, X for Exports, or M for Imports) to which each of the following belongs: a) A US resident's purchase of a new automobile manufactured in Japan. b) A household's purchase of one hour of legal advice - c) Construction of a new house- d) An increase in semiconductor inventories over last year's level- e) A city government acquires new police cars Japan purchases wood from the US to produce frames for homes in Japan g) Cypress College, a public school, purchases new computers for its computer lab -Explanation / Answer
Explanation given in bracket.
a) Import
(US resident's purchase of a new automobile manufactured in Japan. Since the automobile is manufactured in Japan, when it is purchased by a US resident it is accounted in Imports by the US National Income Accounting. It also important to note that its a purchase of NEW automobile, not old. Hence, no problem of double counting.)
b) Consumption
(A households purchase of a new house. Since its a purchase by household /private not government. Its included in consumption)
c) Investment
(Construction of a new house is an investment expenditure because its not going to be used up in a short period of time. It is an investment made by the household)
d) Investment
( Increase in semiconductor inventories over last year's level made by the firm is an investment made by the firm hoping to earn more money with the help of this investment.)
e) Government purchases
( A city government acquires new police cars is a purchase made by the government. Police cars are an investment as they ar going to help police work better.)
f) Export
(Japan purchasing wood from US is an export for US. As the wood is going to be used in Japan and its an import for Japan)
g) Govenment purchases.
(A Public school purchases new computers for its computer lab. Since it is a Public school, run by the government any purchase is a government purchase whether for consumption or investment)