3. Gross Private Domestic Investment undertaken by business is designated by— (Ig). This include, a. All final purchases of machinery, equipment, and tools. b. All construction (including residential). c. Changes in business inventory. i. If total output exceeds current sales, inventories increase. ii. If businesses are able to sell more than they currently produce the change in inventories will be negative. d. Noninvestment transactions – despite how the term “investment” is used by the general public, investment does not include transfers of ownership of paper assets (stocks and bonds) or real assets (houses, jewelry, art). Only the value of newly created capital is counted as investment. e. Net Private Domestic Investment—(In). i. Each year as current output is being produced, existing capital equipment is wearing out and buildings are deteriorating; the value of the change in value due to this is called depreciation or consumption of fixed capital . ii. Gross Investment minus depreciation ( consumption of fixed capital) is called net investment. iii. If more new structures and capital equipment are produced in a given year than are used up, the productive capacity of the economy will expand. iv. When gross investment and depreciation are equal, a nation’s productive capacity is does not change. v. When gross investment is less than depreciation, an economy’s production capacity decreases. 4. Government Purchases of consumption goods and capital good is designated by – G. This category includes, a. Spending by all levels of government (federal, state and local). b. All direct purchases of resources (labor in particular), by governments. c. This entry excludes transfer payments since these outlays do not reflect current production. 5. Net Exports to foreign countries is designated by—Xn. This category includes, a. All spending on final goods produced in the U.S. that are purchased abroad.
b. Imports are goods and services purchased and measured in the U.S. but produced abroad. c. Net exports, (Xn) is the difference between exports and imports and can be either a positive or negative depending on which (exports or imports) is larger. 6. The accounting identity is GDP = C + Ig + G + Xn E. Income Approach to GDP: Demonstrates how the expenditures on final products are allocated to resource suppliers. 1. Compensation of employees includes wages, salaries, fringe benefits, supplements, and payments made on behalf of workers like social security and other health and pension plans. 2. Rents: payments for supplying property resources adjusted for depreciation. 3. Interest: payments from private business and government to suppliers of money capital. 4. Proprietors’ income: income of unincorporated businesses, sole proprietorships, partnerships, and cooperatives. 5. Corporate profits: After corporate income taxes are paid to government, dividends are distributed to the shareholders, and the remainder is left as undistributed corporate profits (also referred to as retained earnings).