Components of GDP

1
Components of GDP

• GDP comprises 5 components
• Consumption, Investment, Government Spending,
  Exports, and Imports

2
Consumption

• Consumption (C) is the value of goods (including
  durable goods) and services purchased by
  households during the year.
• The primary determinant of C is disposable
  income. Disposable income is income after taxes.
  
• Other determinants of C include the price level,
  wealth, interest rates, the relative prices of
  imports, and expectations.
• For example, an increase in the relative price of
  imports will increase Consumption.

3
Investment

• Investment consists of spending on new capital
  equipment, residential and commercial structures,
  and changes in inventories.
• Investment is production that is NOT used for
  current consumption.
• Investment primarily depends on interest rates
  and business expectations.

4
Government Spending

• Government spending includes purchases of goods
  and services as well as investments in public
  infrastructure.
• G does not include transfer payments.
• To fund their activities, governments rely on
  taxes.
• Nevertheless, G is not necessarily influenced by
  tax collections. Sometimes its hard to say what
  G does depend upon.

5
Net Exports

• Net Exports is Exports Imports.
• I prefer to separate the 2 components, because
  they react differently.
• Exports respond to the income and wealth of
  people in other countries, interest rate
  differentials, exchange rates, and relative
  prices.
• Imports respond to domestic income and wealth,
  interest rate differentials, exchange rates, and
  relative prices.
• For example, when dollars depreciate (become
  cheaper for people in other countries), X goes up
  because our goods are cheaper, and M goes down
  because their good our more expensive.

6
GDP Y Q

• GDP is our measure of aggregate output, which we
  sometimes denote Q.
• Every dollar of production generates a dollar of
  income so GDP also equals Y (for income).