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Understanding Gross Domestic Product Components

The document outlines the calculation of Gross Domestic Product (GDP) using the expenditure method, which includes household consumption, gross domestic investment, government purchases, and net exports. It details the components of household consumption, types of investments, and the role of government spending in the economy. Additionally, it explains how net exports are determined by subtracting imports from exports.

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Moi Moi
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20 views1 page

Understanding Gross Domestic Product Components

The document outlines the calculation of Gross Domestic Product (GDP) using the expenditure method, which includes household consumption, gross domestic investment, government purchases, and net exports. It details the components of household consumption, types of investments, and the role of government spending in the economy. Additionally, it explains how net exports are determined by subtracting imports from exports.

Uploaded by

Moi Moi
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

CH.

21 – GROSS DOMESTIC PRODUCT

PART I – A SUMMARY

GDP per the expenditure method

GDP = C (household) + I (firms) + G (government) + NX (rest of world)

Must be: fixed, produced locally, and produced this year.

Main question asked is “who bought all these goods and services?”

PART II – DECOMPOSING METHOD TO ITS PARTS

1. C=Household consumption
a) Durable goods: things that last over 1 year (TVs, cars, refrigerators )
b) Nondurable goods: things that last less than 1 year (food, consumables, perishables)
c) Services: non-tangible commodities
The data on C obtained from sellers of first g/s to households.

2. Gross Household Domestic Investment (the total purchases made for the purpose of investment)
a) Physical capital (aka fixed business investment), e.g. factories, machines, equipment…
b) Changes in investments: finished goods ready to be sold in the future. Must be included to
ensure not all output is accounted for in expenditure method (even when not sold)
c) Residential investment
All the homes & apartments constructed this year. This is included under the “investments”
(and not households) to ensure that the house/apartment is accounted for in the year it was
produced).
Gross Fixed Capital Formation (GFCP) is the sum of all investments except inventories (changes):
𝐺𝐹𝐶𝑃 = 𝐹𝑖𝑥𝑒𝑑 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 + 𝑅𝑒𝑠𝑖𝑑𝑒𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑛𝑒𝑡

3. Government purchases of g/s


a) Everything the government buys for its operation, e.g. supplies, services of engineering firms,
army supplies, etc.
b) All salaries paid to government employees. The reason we include the salaries paid to those
employees here (and exclude them in the private sector) is because the government
does not produce market g/s.
4. Net exports = exports − imports = X − M = NX
The data comes from
a) Exports of g/s (produced here, bought by foreigners)
the customs authority
MINUS
of the country (ports,
b) Imports of g/s (produced there & bought by us)
sea ports, etc.)

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