CFA Practice Question

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CFA Practice Question

A consumer purchases a new house for his own family to live in. The price is $600,000 and it will last for 60 years. Under the expenditure approach, ______
A. personal consumption expenditures will be added to by $600,000, since the house is a personal expenditure, not business goods.
B. personal consumption expenditures will be added to by $10,000 ($600,000 / 60 years), since the house is expected to last for 60 years.
C. gross private investment will be added to by $600,000, since the house can be seen as an investment.
Explanation: Many goods possess both consumer- and investment-good characteristics. There is not always a clear distinction between the two. National accounting procedures have rather arbitrarily classified household purchases except housing as personal consumption. A house is an investment good because it will also provide a stream of services long into the future.

User Contributed Comments 2

User Comment
bahodir How about cars? Since they provide a stream of services long into the future (not so long as houses do, though), are they also investment?
jackwez I would say not as a car is a depreciable asset therefore personal consumption. Most houses in the long run appreciate. Additionally, most buyers expect their house to appreciate, where as most cars are never sold for more than what you purchased them for.
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