Question

What are the four components of Gross Domestic Product (GDP)? Describe each component and provide examples of goods or services for each component.

Answer 1

The four components of GDP are:

1) Personal Consumption Expenditure:

It includes all the expenditure made by the residents on the consumption of goods and services in the economy. The purchase of cars or availing healthcare services comes under consumption component of the GDP

2) Investment

It implies the addition to the capital stock of the economy. It includes Business Fixed Investment which is the investment made by firms on the purchase of business equipment such as capital goods. It also includes the net change in inventory stock during the year. It also includes the construction of new residential housing.

3) Government Expenditure

It includes spending made by the government on the purchase of goods and services. Such as salaries paid by the government to government employees.

4) Net Export

Net Exports is Exports minus Imports. Exports thus add to the GDP and Imports are deducted from GDP. Import of Petroleum bring the GDP down and export of cars raises the GDP of the country.