Components of Gross domestic product
Course title and number
Components of Gross domestic product
The gross domestic product is defined as standard measure accounting all the finished goods and services expenditure in a country. The expenditures include the final consumption, capital formation and the exports. Therefore gross domestic product is all these expenditures minus the imports (Lequiller et ., al 2006). This is thereby represents the income of a country on the production. There are four major components of the gross domestic product. These include private consumption expenditure, investment expenditure, government purchases of services and goods and the net export.
Private consumption expenditure
These are the spending or consumptions on monetary values of goods and services of the households on their daily. For example, when a resident of country wants to satisfy their needs they require some goods and services that are related to their needs. These include durable goods such as cars and other non-durable goods such as clothing and food. Therefore the daily spending in the life of an individual contributes to the consumption expenditure.
Consumer expenditures result to budget constraints due to the daily spending. A change in tax affects the consumer expenditure changing their consumer spending. High consumption expenditure affects the households due to more spending on the daily life.
These are the purchases that the companies make on their inventories to enable them produce the consumer products (Lum et., al 2006). An example is the expenditure for the manufacture of a good such as car. The company requires making an inventory for the requirements of the car assembly. Therefore there are expenditures that are incurred in the purchasing of the raw materials and in the process of manufacture. These therefore are termed as the investment expenditures.
These influence the daily lives of consumers who buy the goods and services produced and the producers. An increase in the cost of production increases the investment expenditure on the producer and will therefore equate to an increase in price which therefore affects the consumer. This therefore indicates that the investment expenditure affects both the producer and the consumer.
This component consists on f the spending of the government on all finished goods and services.
For instance a government of a certain country can make transfer payments and capital expenditure that include financial aids, giving of subsidies to their firms, social security and provision of transport means, health care facilities, and research findings. These therefore equate to the expenditures of the government.
An increase in the government expenditures raises the tax burden on both the citizens and the other private investors. This therefore affects the standards of living of the citizens due to the increase in their local budgets and expenditures.
Net exports of products and services
This component shows a difference between the foreign spending on exports and domestic spending on imports. This is because the exports and the imports have different effect on the gross domestic product (Balassa, B. 2014). This difference therefore indicates the net-exports.
For example Japan, exports several technological devices than they import. This therefore makes Japan to earn from the import-export therefore becoming a net exporter. When the net export is low there is an increase in price of the exports hence their exports gain less than the imports.
The total production of an economy can be measured through summing up all the components of the gross domestic product. Therefore understanding the components of the gross domestic product enables measuring and accounting the health of a country’s economy in a given period of time.
Balassa, B. (2014). Development Strategies’. International Economics and Development: Essays in Honor of Raúl Prebisch, 159.
Lequiller, F., Blades, D. W., & Blades, D. (2006). Understanding national accounts. OECD Publishing.
Lum, S. K., & Moyer, B. C. (2001). Gross Domestic Product by Industry for 1998-2000. Survey of Current Business, 81(11), 17-33.