Question

What are the four components of GDP?, Which is the largest component?, What does this largest component's spending represent? What is the largest component of the largest component? What effect do changes is this component have on overall GDP? Why? Do you think the economy is in a recession? Why?

Answer 1

1)

The four components of gross domestic product are :

Personal consumption expenditures (C)

Gross private domestic investment (I)

Government consumption expenditures and gross investment (G)

Net exports (X-M)

The formula to calculate GDP by expenditure method is Y = C + I + G + X.

That stands for: GDP = Consumption + Investment + Government + X (net exports, or imports minus exports.)

2)From the expenditure angle, Personal consumption expenditures (C) is the largest component of GDP.Almost 70 percent of what the United States produces is for consumer spending. In 2017, that was $11.89 trillion.Personal consumption expendituresmeasures 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; 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.

3)From the expenditure angle, Services is the largest component of Personal consumption expenditures (C).In 2016, American households spent $11.6 trillion. Sixty-five percent went toward services. The biggest component in it was housing services, at $2 trillion.

4)

Personal consumption expenditures has an immediate impact on GDP. An increase of consumption raises GDP by the same amount, other things equal.Since current income (GDP) is an important determinant of consumption, the increase of income will be followed by a further rise in consumption: a positive feedback loop has been triggered between consumption and income. An autonomous increase of consumption, if at the same level of income, would reduce savings, but the positive loop which is Keynesian multiplier will imply an increase of income level with a positive impact on future savings.

If directed to goods and services produced abroad, an increase of consumption will immediately push up imports, while a similar indirect effect will result from consuming domestic products requiring foreign raw materials, energy, semi-manufactured goods.Since usually the States separately tax consumption (say with a VAT tax), an increase of consumption will also boost this type of State revenue,as well as import duties revenue in the case of imported goods. The growth mechanism of consumption-income will also provide State revenue through income taxes.