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GDP Components Explained

There are four main components that make up GDP: 1) Private consumption expenditure by households on goods and services. 2) Investment expenditure by firms which includes business investment, inventory investment, and residential/public construction. 3) Government purchases of goods and services which includes investment, supplies, wages, and salaries. 4) Net exports, which is the difference between the value of exports and imports. GDP is calculated as the total of private consumption, investment, government purchases, and net exports.

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272 views9 pages

GDP Components Explained

There are four main components that make up GDP: 1) Private consumption expenditure by households on goods and services. 2) Investment expenditure by firms which includes business investment, inventory investment, and residential/public construction. 3) Government purchases of goods and services which includes investment, supplies, wages, and salaries. 4) Net exports, which is the difference between the value of exports and imports. GDP is calculated as the total of private consumption, investment, government purchases, and net exports.

Uploaded by

akash sheelvanth
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COMPONENTS OF GDP

 Meaning of GDP
Is the market
value of all final goods and services
within a country in a given year is
called as gross domestic product.
FOUR COMPONENTS OF GDP
I. Private Consumption Expenditure (c)
II. Investment Expenditure (I)
III. Government Purchases of Goods and
Services (G)
IV. Net Exports (X-M)!
1. Private Consumption Expenditure (C)
(Consumption spending by household)
This components measures the money value of consumer goods
and services which are purchased by households and non-profit
institution for current use during a period of account.
These are classified into consumer durables, semi-
durables, non-durables and services. This classification of
consumer goods is based on the length of time within which
consumers goods are used.

Eg : Food, Households, Medical Expenses, Rent, Jewellery etc.


Private consumption expenditure includes expenditure
on all these categories of goods and services.
2. Investment Expenditure
Investment means additions to the physical
stock of capital during a period of time: gross private domestic
investment shows the aggregate value in this regard.
Investment includes building of
machinery, housing construction, construction of factories
and offices and additions to a firm’s inventories of goods,
Whereas intermediate goods are used up in the
process of making other good, capital good (like machinery,
building, ETC…) get partially depleted in producing other
goods and services. This is called depreciation of fixed capital
goods.
Investment is further classified into following four
categories
(a) Business Fixed Investment
It Is the amount which business units spend of purchase of
newly produce capital goods like plant and equipment. It should be kept
in mind that depreciation occurs only in fixed capital goods.
(b) Inventory investment (or change in stock):
It is the net change in inventories (stock) of final goods
awaiting sale of finished goods, semi-finished goods and raw material.
(c) Residential construction Investment:
This is the amount spent on construction of flats and
residential houses. The investment is said to be gross when depreciation
is not deducted.
(d) Public Investment:
This includes capital formation by government in the from of
building of roads, bridges, canals, school, hospitals, etc. this investment
is called gross when depreciation is not deducted and net when
depreciation has been subtracted.
3. Government Purchases of Goods and
Services (G)
This components summarises government
spending on final goods and services.
It includes
1. Investment Expenditure by Government.
2. Purchase of intermediate goods.
3. Wages and salaries paid by the government.
4. Salaries of public servants.

 It dose not include any transfer payments, such as


social security or unemployment benefits.
4. Net Exports (X-M)
It shows the difference between
domestic spending on foreign goods (i.e., imports)
and foreign spending on domestic goods (i.e.,
exports). thus, the difference between Exports (X) and
Imports (M) of a country is called net Exports (X-M):
To sum up, gross domestic product
(GDP) is the total value of sum of consumption
expenditure by household (c), Investment Expenditure
by firms (I), government purchases (G) and Net
Exports. (X-M). Symbolically;
GDP=C+I+(X-M)
THANK YOU

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