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 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):
ADVERTISEMENTS:
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 firm’s 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:
ADVERTISEMENTS:
(a) Business Fixed Investment:
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.
ADVERTISEMENTS:
(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 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)