GDP

Components of Gross Domestic Product (4 Components)
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Components of Gross
Domestic Product (4
Components)
by J.Singh GDP
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Four major components of GDP are: 1. Private

Consumption Expenditure (C) 2. Investment
Expenditure (I) 3. Government Purchases of Goods and

Services (G) 4. Net Exports (X M)!
Some economists have suggested an alternative
approach to measure GDP as Sum of Expenditure.

Gross Domestic Product (GDP) can be measured by
taking into account all final expenditure made during a
period of account in the economy.
1. Private Consumption Expenditure (C):
(Consumption spending by households) This
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component measures the money value of consumer
goods and services which are purchased by households

and non-profit institutions for current use during a
period of account. These are classified into consumer

durables, semi-durables, non-durables and services;
(see Section 6.6 part 3(1)) Broadly, this classification of

consumer goods Is based on the length of time within
which consumer goods are used. Private consumption
expenditure includes expenditure on all these categories

of goods and services.
2. Investment Expenditure (I):
Investment means additions to the physical stock of
capital during a period of time: Gross Private Domestic

Investment shows the aggregate value in this regard.
Investment Includes building of machinery housing
construction, construction of factories and offices and

additions to a firms inventories of goods.
Whereas intermediate goods are used up in the process
of making other goods, capital goods (like machinery,
building, etc.) get partially depleted in producing other
goods and services. This is called depreciation of fixed
capital goods.
Depreciation is fall in the value of the existing capital

stock which has been consumed or used up in the
process of producing output, {see Section 6.6 part 14]

Investment can be gross and net. Gross investment
includes value of depreciation whereas net investment is
obtained by deducting depreciation value from gross
Investment.
Investment Is further classified into following

four categories:
(a) Business Fixed Investment:

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It is the amount which business units spend on
purchase of newly produced capital goods like plant and

equipment. Gross Business Fixed Investment is the
gross amount spent on newly produced fixed capital
goods. When depreciation is deducted from it, we obtain

Net Business Fixed Investment. It should be kept in
mind that depreciation occurs only in fixed capital
goods.
(b) Inventory Investment (or change in stock):

It is the net change in inventories (stock) of final goods
awaiting sale of finished goods, semi-finished goods and

raw material. These are included because they represent
currently produced goods which are not included in the
current sale of final output.
(c) Residential Construction Investment:

This is the amount spent on construction of flats and
residential houses. The investment is said to be gross

when depreciation is not deducted. Net investment is
gross investment minus depreciation.
(d) Public Investment:
This includes capital formation by government in the
form of building of roads, bridges, canals, schools,
hospitals, etc. This investment is called gross when
depreciation is not deducted and net when depreciation

has been subtracted.
3. Government Purchases of Goods and Services
(G):
This component summarises government spending on

goods and services. It includes (i) purchase of
intermediate goods and (ii) wages and salaries paid by
the government. All government purchases are a proxy

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measure for government output.

Such government purchases are treated as part of the
final product. Transfer payments which are made by
government to households and firms are not counted as

part of GDR This is to avoid double counting since the
consumption or investment by recipients of the transfer

payments is counted in C and I.
4. Net Exports (X M):
It shows the difference between domestic spending on

foreign goods (i.e., imports) and foreign spending on
domestic goods (i.e., exports). Thus, the difference
between Exports (X) and Imports (M) of a country is

called Net Exports (X- M).
To sum up, Gross Domestic Product (GDP) is the total

value of sum of Consumption Expenditure by
households (C), Investment Expenditure by firms (1),
Government Purchases (G) and Net Exports. (X- M).
Symbolically:
GDP = C + I + G + (X-M)
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Components of Gross Domestic Product (4 Components)

Four major components of GDP are: 1. Private

Expenditure (I) 3. Government Purchases of Goods and

approach to measure GDP as Sum of Expenditure.

Components of Gross Domestic Product (4 Components)

component measures the money value of consumer

goods and services which are purchased by households

period of account. These are classified into consumer

(see Section 6.6 part 3(1)) Broadly, this classification of

which consumer goods are used. Private consumption

expenditure includes expenditure on all these categories

2. Investment Expenditure (I):

Investment means additions to the physical stock of

capital during a period of time: Gross Private Domestic

construction, construction of factories and offices and

Depreciation is fall in the value of the existing capital

process of producing output, {see Section 6.6 part 14]

Investment Is further classified into following

(a) Business Fixed Investment:

Components of Gross Domestic Product (4 Components)

It is the amount which business units spend on

purchase of newly produced capital goods like plant and

gross amount spent on newly produced fixed capital

goods. When depreciation is deducted from it, we obtain

(b) Inventory Investment (or change in stock):

awaiting sale of finished goods, semi-finished goods and

(c) Residential Construction Investment:

residential houses. The investment is said to be gross

depreciation is not deducted and net when depreciation

This component summarises government spending on

the government. All government purchases are a proxy

Components of Gross Domestic Product (4 Components)

measure for government output.

government to households and firms are not counted as

consumption or investment by recipients of the transfer

It shows the difference between domestic spending on

between Exports (X) and Imports (M) of a country is

To sum up, Gross Domestic Product (GDP) is the total

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