(a) "Machine purchased by a firm is always a capital good." Do you agree with the given statement ? Give valid reasons for your answer. (b) Define the following : (i) Net Exports (ii) Externalities (iii) Problem of Double Counting

Question

Accepted Answer

(a) Machine purchased by a firm is NOT always a capital good.

Reason:
- If the machine is used for production of other goods, it is a capital good
- If the machine is purchased for resale, it is a trading good
- If the machine is used by the final consumer, it is a consumption good
- The economic use determines the classification, not the nature of the good

(b) Definitions:

(i) Net Exports: The difference between value of exports and imports of goods and services.
Net Exports = Exports (X) - Imports (M)

(ii) Externalities: Benefits or costs of economic activity that affect third parties not directly involved in the transaction. They can be positive (benefits) or negative (costs).