Question

Critical analysis Q4 Suppose a group of British Investors finances the construction of a plant to manufacture bay boats in Houston, 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.

Answer 1

Profits are not considered a component of GDP because GDP measures the value of all final goods and services produced within a country's borders during a specified period.

Step-by-step explanation:

The correct answer is C) Profits are not a component of GDP.

Profits are not considered a component of GDP because GDP measures the value of all final goods and services produced within a country's borders during a specified period. Profits are part of the income generated by businesses, but they are not included in GDP calculations. Only the value of the final goods and services produced is counted in GDP.

Answer 2

The correct answer is option (D) Profits earned in the domestic economy are counted as part of GDP under the resource cost-income approach.

Step-by-step 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.