Critical analysis Q4 Suppose a group of British Investors finances the construction of a plant to manufacture bay boats in Houst
on, Texas The construction of the plant will have no effect on U.S. GDP. Suppose the plant generates $250,000 in corporate profits this year. These profits will have no effect on U.S. GDP for which of the following reasons? A) Only losses count against GDP.
B) Foreign Income earned within U.S. borders must be deducted from production.
C) Profits are not a component of GDP.
D) Profits earned in the domestic economy are counted as part of GDP under the resource cost-income approach.
The correct answer is option (D) Profits earned in the domestic economy are counted as part of GDP under the resource cost-income approach.
Explanation:
Solution
Gross domestic product (GDP) refers to sum of all value of goods and services manufactured within the geographical border of the country.
Now the investment for plant in carried within the geographical borders of The United States so it will include in GDP as gross domestic capital formation.
Thus the construction of the plant will cause a rise in U.S GDP.
Now this plant produce profit of $250000. profit produced within the economy so it will include in GDP.
These profit will increase US GDP since profits gained in the domestic economy are counted as a part of GDP under the resource cost or operating in income approach.
Derived demand implies the quantity requested to manufacture a good is directly related to the supply requested from the market. If the demand for the good increases, it means the quantity of the materials needed to manufacture that good will increase as well.
