A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result, a) U. S. investment and GDP increase, but German GDP is unaffected. b) U. S. investment and German GDP increase, but U. S. GDP is unaffected. c) U. S. investment, U. S. GDP, and German GDP are unaffected because tractors are intermediate goods. d) U. S. investment, U. S. GDP, and German GDP all increase.

Question

Hailie Riley

Business

2 April, 13:32

A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result, a) U. S. investment and GDP increase, but German GDP is unaffected. b) U. S. investment and German GDP increase, but U. S. GDP is unaffected. c) U. S. investment, U. S. GDP, and German GDP are unaffected because tractors are intermediate goods. d) U. S. investment, U. S. GDP, and German GDP all increase.

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Answers (1)

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Alayna Burnett · Answer 1

The correct answer is option a.

Explanation:

A Minnesota farmer buys a new tractor made in Iowa by a German company.

This transaction will lead to an increase in US investment and US GDP. There will be no effect on German GDP.

Since tractor is a capital good its purchase will be included as investment expenditure. Even though the company is German, the production and sale take place within the geographical boundaries of the US, the transaction will be included in the US GDP, not in German GDP.