Question

Which of the following transactions are examples of consumption, investment, government expenditure or Net Exports. Justify each answer

1) A domestic airline manufacturer sells a new airplane to the Air Force (i.e. government)

2) A domestic car manufacturer sells a new car to a domestic hockey player (i.e private individual)

3) A domestic car manufacturer manufacturer builds a car to be sold next year.

4) A domestic airline manufacturer sells a new airplane to a foreign airline operator.

5) A domestic airline manufacturer sells a new airplane to a domestic airline operator.

Answer 1

(1) Government expenditure

Since the government has spent money for purchasing a good (airplane) from domestic seller, this is government spending.

(2) Consumption

Sale and purchase of domestically-produced goods to a resident citizen is personal consumption expenditure (durable goods).

(3) Investment

Since the car produced in this year will be sold next year, it will be added to inventory, and is inventory addition as considered within the gross domestic private investment component.

(4) Net exports

Sale of domestically-produced goods to a foreign buyer is an export of goods, so is considered under net exports.

(5) Investment

When the domestic airline buys a domestically-produced airplane for its business operations, this is considered within the gross domestic private investment component (non-residential).