Components of GDP

Were you able to answer the question that I closed my last blog with? Well if you were paying attention to what you were reading, you would have instantly said that the difference between Nominal GDP and Real GDP is inflation. If you did then you are correct! Remember, price change IS inflation.

Now, GDP, which ever kind it may be, clearly is not the same over time. Moreover, the rate of change in GDP is neither constant over time. This makes it important for a business man or woman to know how GDP has changed so they can take appropriate actions that will keep their businesses going. However, to stay ahead of the game, business people must know how to make predictions. They must understand what causes sudden changes in GDP, and from knowing what causes these changes, they should be able to predict what turn the economy will take before it happens.

What do they look for? What causes changes in Nominal GDP, Real GDP, and Per Capita GDP? There are  four components that do and they are as follows:

1. Consumption: purchases of goods and services made by households, including purchases of nondurable goods, durable goods, and service.
2. Investment: goods that are purchased for future use, including fixed business investments, fixed residential investments, and inventory investments.
3. Government Purchases: goods and services bought by the federal government.
4. Net Exports: the difference between Imports and Exports being made by a country as a whole.

When added together, these components equal Nominal GDP. Then of course, from Nominal GDP we derive Real GDP and the Per Capita GDP. Considering that these four components are equal to GDP, can you now think of another possible name for GDP? If you have taken an introductory macro economics class at some point, then you would know that adding all four components give you output. So another name for GDP would be output. The famous equation that displays this relationship is …

Y=C+I+G+NX

Output=Consumption+Investments+Government Spending+Net Exports

In the posts following this one, the effects of each of these components will be discussed.

[Via http://monicashiwratan.wordpress.com]