The Economy and You #8: What Makes Up the U.S. GDP?
In my last article, I wrote about how gross domestic product (GDP) is used to measure the health of our nation’s economy and how this number can be calculated in two different ways – the income method and expenditure method.
Using the expenditure method, GDP is calculated by totaling the entire amount spent on goods and services created in our country’s economy. To do this, we need to identify the main types of expenditures in an economy.
First we must recognize that there are four main groups in the economy: households, firms, the government, and the rest of the world. These groups create all of the goods and services transactions that take place in the economy. Now that we have identified the participants in the economy we can distinguish the four main categories of expenditures that are used to calculate a nation’s economic output. Those categories are personal consumption, investment, government purchases, and net exports.
Personal consumption, often identified as the letter C, is the amount of household spending on consumer goods. Investment identified as “I” is spending by firms and households on new capital like plants, equipment, inventories, and residential housing. Government purchases (or G) is all government spending (federal, state and local) on goods and services. This includes salaries, school building, and nuclear submarines as just a few examples. Government purchases do not include transfer payments like social security and veterans’ benefits because no goods or services are purchased. Finally, net exports signified by NX is the net spending by the rest of the world for our exports minus our purchase of imports. The expenditure approach to calculating GDP adds together these four components of spending to attain the nation’s GDP.
More than 70% of our GDP can be classified as personal consumption. This means that over 70% of what theU.S.produces is spent on consumer goods. In dollar terms, this amounts to more than $10 trillion of the U.S $14.6 trillion GDP in 2010. Nearly half (47%) of GDP that is classified as consumption is for services, not products. These include everything from legal and financial services to health care.
Goods or products are nearly a quarter of the economy. These are further divided into two sub-categories. Non-durable goods are 16% of GDP. The three largest components of non-durable goods are food, clothing and fuel. Durable Goods, such as automobiles and furniture, is the smallest category, at only 7% of GDP.
Business investment, such as software, business equipment, and manufacturing, comprise 16% of economic output. It includes construction of housing and commercial real estate, but doesn’t count the resale of real estate.
Government spending is 20% of total GDP, up from 17% in 2000. State and local government produce 12% of GDP. The Federal Government produces 8% of GDP, and two-thirds of this is related to defense.
Net exports have an opposite effect on GDP. Exports add to the GDP, while imports subtract from GDP. U.S. imports are greater than exports, and so the net effect of trade is negative and reduces the size of GDP.
In 2010, the United States GDP was approximately $14.6 trillion. The U.S. is the largest national economy in the world. Still, how does the U.S. compare to different countries in terms of GDP. Stay tuned to my next article see a comparison of economic output among countries throughout the world.