Components of Gross Domestic Product

2021-05-18 14:01:40
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Gross Domestic Product (GDP) is the market value monetary measure of all output goods produced in a particular period either yearly or quarterly. GDP is used to estimate the progress of the countrys economy as it is the primary indicator. GDP represents the value of the total dollar of all services and goods produced within the geographic borders of a nation during a specific period. GDP consists of four major components, and they include Investment Expenditure (I), Government Purchases expenditure (G), Net Exports (X M), and Private Consumption Expenditure (C). GDP also can be measured by summing up spending as some economists suggest. Therefore, this topic will entirely cover the major components of GDP.

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GDP=C+ I+ G+ (X-M)

Net Exports (X M) shows the difference between exports (foreign spending on domestic goods) and imports (domestic spending on foreign goods). In such terms, the difference between imports (M) and exports(X) of a country is the net export(X-M) (Balassa, 2014, 159). The exports and imports have the opposite effects. This is because as the imports subtract, the exports add to the GDP. In that regard, The U.S. economy of service based's hard to export due to trade deficit made as they import more than what they export. With them despite the gains from the production of domestic shale oil but still, they import a lot of petroleum.

Government spending (G) summarizes the expenditure of goods and services, which includes payment of salaries and wages by the government, and purchases of goods. This government purchases form part of the final product. To avoid double counting Transfer payments to firms and households by the government are not counted as GDR constituent because investment or consumption is included in C and I. another component is Investment Expenditure (I). Investment is referred to what one adds to the capital of the physical stock in a particular period. In this regard, the aggregate value Gross Private Domestic Investment. In such terms, investment includes additions to the inventories of a firm, construction of offices and factories. In the process of depreciation, intermediate products are depleted to produce other goods. In that conjunction, depreciation is the decrease in the value of the present capital stock that has been used up or consumed during the production process. Investments are of two types such as net and gross. Net investment is what remained after deducting gross investment and depreciation value. Gross investment is the depreciation value.

Categories of investment expenditure (I) are Public, Residential Construction, Inventory, and Business Fixed Investment. Public Investment includes government capital formation in the form of building of hospitals, schools, canals, bridges, and roads. In that case, when depreciation is deducted this investment is called net and gross when it is not subtracted (Konchitchki, and Patatoukas, 2014, 80). Residential Construction Investment is the amount spent on building residential houses and flats. In this case, net investment is the deduction of depreciation from gross. The investment is said to be gross when there is no deduction for depreciation. Change in stock or inventory investment is the net change in stock (inventories) of final products awaiting sale of raw materials, semi, and finished goods. As they represent goods produced currently, which are not inclusive in the final output current sale, they should be included in the determination of GDP and Business Fixed Investment.

Private consumption expenditure (C) measures the value of money for services and consumer goods purchased by the non-profit institutions and households for current use during the accounting period. In that regard, these have been classified into services, consumer non-durables, semi-durables, durables. Private consumption expenditure (C) includes all these categories of services and goods on the expenditure. To conclude is that GDP is the total value of firms investment expenditure (I), Government Purchases (G), Net Exports. (X- M) And household consumption expenditure (C). Thus, it is represented as

GDP=C+ I+ G+ (X-M)


Balassa, B., 2014. Development Strategies'. International Economics and Development: Essays in Honor of Raul Prebisch, p.159.

Konchitchki, Y. and Patatoukas, P.N., 2014. Accounting earnings and gross domestic product. Journal of Accounting and Economics, 57(1), pp.76-88.

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