Question

Short answer. Paragraph form:

It is conventional to divide the nation's total production into four categories. Name and explain the four categories in detail. In the United States, which category accounts for the largest share and the smallest share of the nation's total production? Explain. Find the current values of these categories online and comment on your results.

Answer 1

Total production is divided into four parts:

Personal consumption expenditures-

Almost 70 percent of what the United States produces is for consumer spending. In the fourth quarter of 2017 that was $13.65 trillion. The BEA sub-divides personal consumption expenditures into goods and services.

Goods are further sub-divided into two even smaller components. The first is durable goods, such as autos and furniture. These are items that have a useful life of three years or more. The second is non-durable goods, such as fuel, food and clothing. The retailing industry is a critical component of the economy since it delivers all these goods to the consumer. The BEA uses the latest retail sales statistics as its data source.

Since this report comes out monthly, it gives you a preview of this component of the quarterly GDP report.

Services are almost half of U.S. GDP. These include commodities that cannot be stored and are usually consumed when purchased. It's increased a lot since the 30 percent services contributed in the 1960s.

Investment-

Business investment includes purchases that companies make to produce consumer goods. But, not every purchase is counted. If a purchase only replaces an existing item, then it doesn't add to GDP and isn't counted. Purchases must go toward creating new consumer goods to be counted.

In Q4 2017, business investments were $3.06 trillion. That's 16 percent of U.S. GDP. It's double its recession low of $1.5 trillion in 2009. In 2014, it beat its 2006 peak of $2.3 trillion.

The BEA divides business investment into two sub-components: Fixed Investment and Change in Private Inventory.

Most of Fixed Investment is non-residential investment. That consists primarily of business equipment, such as software, capital goodsand manufacturing equipment.

The BEA bases this component on shipment data from the monthly durable goods order report. It’s a good leading economic indicator.

A small but important part of non-residential investment is commercial real estate construction. The BEA only counts the new construction that adds to total commercial inventory. Resales aren't included. The BEA adds them to GDP in the year they were built.

Fixed investment also includes residential construction, which includes new single-family homes, condos and townhouses. Just like commercial real estate, the BEA doesn't count housing resales as fixed investments. New home building was $603 billion in That was 4 percent of GDP. Combined, commercial and residential construction was $1.3 trillion, or 7 percent of GDP.

Net exports-

Imports and exports have opposite effects on GDP. Exports add to GDP and imports subtract. The United States imports more than it exports, creating a trade deficit. That's because America still imports a lot of petroleum, despite gains in domestic shale oil production. The U.S. economy is based on services, which are difficult to export.

In 2017, imports subtracted $3.02 trillion, while exports added $2.42 trillion. As a result, international trade subtracted $599 billion from GDP. (Source: U.S. Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.1.5., Gross Domestic Product.)

Government expenditure-Government spending was $3.4 trillion in Q4 2017. That's 17 percent of total GDP. It's less than the 19 percent it contributed in 2006. In other words, the government was spending more when the economy was booming before the recession.

That's exactly when it should have been spending less to cool things off. Slower spending now is a result of sequestration, which was also timed poorly. Austerity measures shouldn't be used when the economy is struggling to recover.

The federal government spent $1.28 trillion in 2017. Almost 60 percent was military spending. State and local government contributions rose to 11 percent. This increase is because government revenues have improved now that the recession is over.