Question

Purchase of a car by a household is an example of:

• A. Capital formation
• B. Intermediate consumption
• C. Final consumption
• D. Inventory investment

Hint:

The key distinction is the buyer: Households buy for Final Consumption; Firms buy capital goods for Capital Formation.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Goods are classified based on their end-use. Final goods are used for final consumption by households or as investment by firms.
Step 2: Detailed Explanation:
(A) Capital formation: This refers to investment in capital assets (machinery, buildings) by firms to produce more goods. A household car is used for personal utility, not production.
(B) Intermediate consumption: These are goods used up in the process of producing other goods (raw materials). A household car is not used as an input for a saleable product.
(C) Final consumption: When a household buys a durable good like a car for personal use, it is satisfying a direct want. This is part of Private Final Consumption Expenditure.
(D) Inventory investment: This is the change in stock of unsold goods/raw materials held by firms.
Step 3: Final Answer:
Since the car is bought by a household for direct satisfaction of wants, it is classified as final consumption.