Question
A Minnesota farmer buys a new tractor made in lowa by a German company. As a result, (1) U.S. investment and GDP increase, but German GDP is unaffected. (2) U.S. investment and German GDP increase, but U.S. GDP is unaffected. (3) U.S. investment, U.S. GDP, and German GDP all increase. (4) U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods.
Ask by Hobbs Page. in Cayman Islands
Feb 03,2025
Real Tutor Solution
Tutor-Verified Answer
Answer
U.S. investment and German GDP increase, but U.S. GDP remains unchanged.
Solution
When a Minnesota farmer purchases a new tractor from a German company, several economic factors come into play:
1. **U.S. Investment**: The tractor is considered a capital investment for the farmer. This increases U.S. investment because the farmer is acquiring a new asset to use in production.
2. **U.S. GDP**: While investment increases, the purchase is an import. In the calculation of GDP using the expenditure approach (GDP = C + I + G + (X - M)), the import (M) increases by the value of the tractor, which offsets the increase in investment (I). Therefore, the net effect on U.S. GDP is neutral.
3. **German GDP**: The sale of the tractor contributes to Germany's exports (X). This increases German GDP because it is an export of goods produced within Germany.
Given these points, the most accurate statement is:
**Answer:**
2. U.S. investment and German GDP increase, but U.S. GDP is unaffected.
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Simplify this solution The Deep Dive
When a Minnesota farmer buys a tractor, it directly contributes to U.S. investment as it reflects spending on durable goods. This, in turn, boosts U.S. GDP because it’s part of the overall economic output. The German company benefits as well, leading to an increase in their GDP, showcasing the international flow of capital in trade. However, if the tractor is considered an intermediate good—used in producing other goods rather than sold directly to consumers—then the transaction itself might not increase the GDP figures directly. Essentially, understanding the distinction between intermediate and final goods is crucial for accurate economic analysis.
