Four Components Of Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) is a calculation that came into use in 1937 in part and in response to the Great Depression. The GDP is defined as “the monetary value of all the finished goods and services produced within a country’s borders in a specific time period” (Investopedia, 2016). The GDP is used as the primary indicator to assess a country’s economic wellbeing. The timelines are usually calculated by quarter or year and are compared to the previous calculation period. The percentage above or below the previous cycle is the end result. Personal consumption expenditures, Investment, Net export and Government expenditures make up the four components of the GDP calculations. …show more content…
Consumption is amount of money and the value that is spent by American households on goods and services. Note that only products that are produced during this time are considered for the GDP, items that were produced in a previous timeframe cannot not be counted as they were already used during that period. Consumption is sometimes divided into three categories being durable goods, non-durable goods and services. Let’s use a restaurant as an example, the table you sit at would be a durable good, the food you order would be a non-durable good and the restaurant expenditure would be the service. One item that determines consumption is the income levels of the consumers. As incomes increases so does purchasing and especially purchasing of larger more expensive “want” items.
Investment accounts for roughly the third largest component accounting for roughly 15% of the total GDP. Investment is defined as “the act of investing; laying out money or capital in an enterprise with the expectation of profit” (FreeDictionary, 2016). Investment in regards to the GDP is similar in that the goods purchased are used to produce goods and services in the upcoming periods. Investment can be both by industry and by personal consumers. Housing would be included in this pool as would plants and equipment for businesses.
Government …show more content…
This calculation is accepted as the normal and approved way to compare economies between countries. By measuring and tracking the GDP we can decide the direction the economy is headed. If the GDP grows to rapidly the assumption is that inflation will rise. On the other side if the GDP declines for consecutive marking periods, then the economy is considered to be in a recession. The governing bodies and the Federal Reserve have to make decision based off of this information and provide known and logical plans to keep the balance between recession and