Question

The Bureau of Economic Analysis divides it's statistics on GDP into four major categories. List the categories of expenditures and define each.   

Answer 1

GDP is the gross domestic product which is expressed as a sum of expenditures incurred by all the major sectors of the economy in buying domestically manufactured goods. It is therefore the market value of the final goods that the nation is able to produce in any particular year with its given resources and within the boundaries of the nation. The four major components are

• personal consumption expenditures,
• gross private domestic investment and gross investment
• net exports of goods and services, and
• government consumption expenditures

The first component is the largest and biggest of all and it includes expenditure on goods including both durable goods and non-durable goods as well as services. Household spend a major proportion of their income in consumping goods and services and a smaller but significant part is saved and invested  

The second component includes Business fixed investment, residential and non residential investment and change in inventories. Investment is the most volatile component and is affected by the rate of interest and other factors that affect investment opportunities

The third category is the spending by domestic households on buying foreign goods (imports) which are deducted from GDP as they represent the purchase of goods not produced by the nation. It includes exports which are the goods and services purchased by foreigners and manufactured by domestic producers. Hence net exports are added

The last category is government spending which includes consumption by government in buying goods and services as well as investment which takes the shape of spending on infrastructures, hospitals etc. It also includes transfer payments which are subtracted from GDP considering it to be a unilateral payment.