In the expenditure approach to GDP, what does the investment (I) component measure?

• A. All government spending, including transfer payments such as Social Security and unemployment benefits
• B. Spending on new capital goods (e.g., equipment and structures), residential construction, and changes in inventories during the period
• C. Purchases of stocks, bonds, and other financial assets by households and firms during the period
• D. Household purchases of final goods and services, including durable goods, nondurable goods, and services

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the expenditure approach to GDP, which calculates GDP as the sum of consumption (C), investment (I), government spending (G), and net exports (NX).
2. Step 2: Recognize that the investment (I) component specifically refers to spending on goods that will be used for future production, not financial transactions or government transfer payments.
3. Step 3: Identify the types of spending included in investment: purchases of new capital goods such as equipment and structures, residential construction (new homes), and changes in inventories held by businesses during the period.
4. Step 4: Differentiate investment spending from other categories: it excludes purchases of stocks and bonds (financial assets), government transfer payments (like Social Security), and household consumption of final goods and services.
5. Step 5: Summarize that investment (I) in the expenditure approach measures the creation of new physical capital and inventory accumulation that contribute to future production capacity.