True or false: GDP is a measure of total investment minus current consumption since investment shouldn’t be counted as a part of GDP.
The correct answer and explanation is:
Correct Answer: False
Explanation:
Gross Domestic Product (GDP) is not calculated as total investment minus current consumption. In fact, investment and consumption are both components of GDP.
GDP measures the total market value of all final goods and services produced within a country’s borders in a given period (usually annually or quarterly). The most common formula used to calculate GDP in an economy is the expenditure approach, which is:
GDP = C + I + G + (X − M)
where:
- C = Consumption (household spending)
- I = Investment (business capital investment, residential construction, and inventories)
- G = Government spending
- X = Exports
- M = Imports
Why the statement is false:
- Investment is included in GDP, not excluded. When businesses purchase machinery, buildings, or increase inventory, it contributes to economic output and is added to GDP. Residential housing construction is also counted as investment.
- Consumption is not subtracted from investment. Consumption (C) is a separate category and represents spending by households on goods and services like food, clothing, and entertainment. It is added to investment and other categories in the GDP formula.
- The idea that investment “shouldn’t be counted” is incorrect. Investment reflects economic activity and future production potential, making it a crucial part of measuring economic performance.
Conclusion:
The statement misunderstands how GDP is calculated and the role of investment and consumption. Since GDP includes both consumption and investment, the claim that it is “investment minus consumption” and that investment “shouldn’t be counted” is false.