Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): A firm’s purchase of new machines is counted as final expenditure in GDP, while the raw materials it uses up are not.
Reason (R): Of the components of GDP in the expenditure method, investment expenditure is the most unstable.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Both statements are true. R is about how much investment varies. It does not say why investment is counted as final expenditure.
Assertion (A): A firm’s purchase of new machines is counted as final expenditure in GDP, while the raw materials it uses up are not. — True. Machines are investment, the I in GDP = C + I + G + X − M. Raw materials used up are intermediate goods, left out to avoid double counting.
Reason (R): Of the components of GDP in the expenditure method, investment expenditure is the most unstable. — True. Investment changes more from year to year than C, G, X or M.
Why R does not explain A?
Being unstable has nothing to do with being a final expenditure. A component would be counted in GDP even if it were very steady.
The real explanation of A: investment goods remain with the firm, whereas intermediate goods are used up in production.
NCERT (2026-27): “2.2.2 Expenditure Method … (b) the final investment expenditure, Ii , incurred by other firms on the capital goods produced by firm i. Observe that unlike the expenditure on intermediate goods which is not included in the calculation of GDP, expenditure on investments is included. The reason is that investment goods remain with the firm, whereas intermediate goods are consumed in the process of production … It may be noted that out of the five variables on the right hand side, investment expenditure, I, is the most unstable.” |