The Components of GDP

The typical treatment of GDP is the expenditure approach, where spending is categorized into the following buckets: personal consumption expenditures (C); gross private investment (I); government purchases (G); and net exports (X – M), composed of exports (X) and imports (M). Textbooks often capture this in one relatively simple equation:

GDP = C + I + G + (X – M)

C is personal consumption expenditures; it measures spending by households on consumer goods and services

Personal consumption expenditures includes spending on goods such as televisions and cell phones, and services such as the internet, streaming services, and wireless plans that make your television, and cell phone useful.

It’s important to note that these are new goods – those thrift store fashions you enjoy don’t count toward GDP because they were counted when they were sold as a new product.

And they are counted when they are sold to the end user – the consumer -- not at each of the various stages of production.

I is gross private investment; this measures spending by businesses on capital goods, these are goods such as machinery, tools, and buildings. Investment also includes household purchases of new homes, and business additions to inventory.

Notice, this is new housing – when the house is resold, it is not counted as a new addition to GDP. That is true for other goods too. GDP is a about measuring production of new goods and services.

G is government purchases; it measures spending by all levels of government on goods, services, and physical capital – including things like bridges, buildings, and highways.

The final category is net exports, which is composed of exports and imports.

X is exports; it includes goods and services produced domestically but sold abroad.

M is imports; it includes goods and services produced abroad but sold here.

You’ll notice in our equation, that all the numbers are added to form GDP, except M, imports. We’ll get to that a little later…

For now, it’s important to know that GDP is calculated as total spending on personal consumption, gross private investment, government purchases, and net exports.