The gross domestic product, or GDP, is a primary indicator used to calculate the health of the economy as compared to a previous year or quarter. The GDP represents the combined monetary value of all services and good produced in a specific period, and in a way, represents the size of the economy. There are four categories included in the GDP used to measure economic production and growth.
Private Consumption Expenditures
A category of the GDP is private consumption expenditures. This category includes all services and goods purchased by households in the United States, such as food, gasoline, vehicles, appliances and other durable and non-durable goods. The amount in this category will fluctuate depending on income, taxes and the saving and spending habits of consumers. The private consumption expenditures category is the largest, and accounts for approximately two-thirds of the GDP.
Investments are another category in the GDP. There are several types of investments included in the category. A fixed investment lies in purchasing capital goods such as machines, factories and robots. Inventory investment is investing in raw materials or other goods awaiting sales. Inventory investment includes positive inventory, or rising inventory, and negative inventory, or falling inventory. The final type of investment included in this category is the residential investment, which occurs when consumers purchase residential homes. Also included in the investment category is the purchase of new machines and construction of new factories by businesses and the any changes in a business’s inventory.
Government purchases are the second largest category of the GDP and account for approximately 20 percent of the GDP. This category includes the total expenditures on services and new goods by the local, federal and state governments. Examples of government purchases are the salaries of congressional representatives, military goods and the salaries of public school teachers. Expenditures not included in this category are transfer payments, such as welfare projects.
The final category in the GDP is the net export category, which is a calculation of the difference between the country’s total exports and imports. Included in this category is the annual amount spent by citizens living in the United States and government agencies and companies on foreign-made or imported products subtracted from the annual amount foreign entities spend on products made in the United States, or exports. The final amount results in one of three types of trade values. A trade surplus is a positive balance of trade, a trade deficit is a negative balance of trade and a trade balance occurs when exports are equal to imports.