Assertion (A): Expenditure on investment goods is included in GDP by the expenditure method, but expenditure on intermediate goods is not.
Reason (R): Investment goods remain with the firm, whereas intermediate goods are used up in the process of production.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): Expenditure on investment goods is included in GDP by the expenditure method, but expenditure on intermediate goods is not. — True. The expenditure method counts investment spending but leaves out spending on intermediate goods.
Reason (R): Investment goods remain with the firm, whereas intermediate goods are used up in the process of production. — True. Investment goods stay with the firm; intermediate goods are used up in production.
Why R explains A?
A good used up in production is already inside the value of the final good, so counting it again would be double counting. An investment good is not used up in this way; it stays as an addition to capital, so its purchase is final expenditure.
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 …” |