GDP components

# GDP components - Topic 3 GDP Components and Foreign Sector...

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Click to edit Master subtitle style Topic 3: GDP Components and Foreign Sector PRINCIPLES OF MACROECONOMICS Dr. Fidel Gonzalez Department of Economics and Intl. Business Sam Houston State University

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Click to edit Master subtitle style GDP components Now, we will talk about the actual equation for GDP and its main components. GDP can be obtained by looking at the spending patterns of households, firms, governments and foreigners. The following is the GDP equation: GDP= C + I + G + NX The equation above is the GDP equation and you MUST know this equation. C=private consumption. When a household buys a good or services to consume it, it is considered part of C. I=private investment When a firm buys machinery, equipments, software, etc, (including changes in inventories) it is considered investment, I. G = government spending The payments of the local, state and federal government to professors, national guard, etc. is considered government expenditures, G NX = net exports The goods and services sold and bought abroad are part of NX.
Click to edit Master subtitle style GDP components: Private Consumption (C) Now we will cover one by one of the GDP components: 1) C: private consumption As mentioned before this refers to the purchases of final goods and services made by private household. When you buy breakfast or a pair of jeans it counts as part of C. As you can tell this is the most important component of GDP but it is also its most stable component . In fact, C is about 70% of GDP. (It was 71% in 2009) C is divided into different components: services and goods. The following show the most important categories of C. C (70% of GDP) Services (66% of C) Goods (34% of C) Durable (32% of Goods) Non-durable (68% of goods) Services include payments for services like hair cuts, lawyers, doctors, plumbers and so on. Durable goods are things that last some time like microwave ovens, refrigerators, appliances, cars, computers, and so on. Non-durable goods are things that consumed almost immediately like food, drinks, water, energy like electricity, gasoline, natural gas, and so on.

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Click to edit Master subtitle style GDP components: Private Consumption (C) As mentioned before, C is the most stable component of GDP. This is in a way a good thing because it allows us to measure GDP better. But Why is C stable? The main reason is that most people do not change their consumption patterns because no one likes to live the high life one day and live under the bridge the next day. Moreover, people get used to certain consumption patterns and it is very difficult to change. This is called, consumption smoothing and we will say that households are consumption smoothers.
Click to edit Master subtitle style GDP components: Private Investment (I) 2) I: private investment This refers to the purchases of goods and services by firms that are used to produce something else, like machinery and equipment. For example, when a firm buys a computer it is considered investment.

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