Economics 504 (2024)

Chapter 11 Outline

II.GDP'S COMPONENTS

A. Consumption

1. Personal consumption expenditures consist of household purchases of durable goods, nondurable goods, and services.

2. Personal consumption expenditures are the largest component of GDP.

3. Personal consumption expenditures are a relatively stable component of GDP.

B. Gross Investment

1. Gross private domestic investment is the purchase of equipment by firms, the purchase of all newly produced structures, and changes in business inventories.

2. Gross private domestic investment consists of net private domestic investment and the consumption of fixed capital.

a. Net private domestic investment is the part of gross investment that addsto the existing stock of structures and equipment.

b. The consumption of fixed capital consists of depreciation and an allowance for accidental damage to the nation's structures and equipment.

3. If net private domestic investment is positive, then the nation's capital stock, and hence the nation's productive capacity increases.

4. If net private domestic investment is negative, the nation's capital stock, and hence the nation's productive capacity decreases.

C. Government Purchases

1. Government purchases of goods and services are the purchases of goods and services by federal, state, and local governments.

a. Transfer payments are excluded from GDP because they do not involvethe production of goods and services.

D. Net Exports

1. Net exports of goods and services is the difference between exports of goods and services and imports of goods and services.

a. Exports are produced in this country and purchased by foreigners.

b. Imports are produced abroad and are purchased by persons in this country.

2. In recent years net exports of goods and services has been a negative component of GDP.