Chapter 1 MEASURING A NATION'S INCOME

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4. The Components of GDP

a. GDP (Y ) can be divided into four components: consumption (C ), investment (I ), government purchases (G ), and net exports (NX ).  Y=C+I+G+NX

b. Definition of consumption(C ): spending by households on goods and services, with the exception of purchases of new housing.

*Note that household spending on education is also included in consumption of services.

c. Definition of investment(I ) : spending on goods that will be used in the future to produce more g&s, called capital goods.

 *Including spending on capital equipment, inventories, and structures, also including household purchases of new housing.

* The value of housing services is counted as consumption in GDP, either when the house is rented or the house is owner-ocuppied.

d. Definition of government purchases(G ) : spending on goods and services by governments.

1) Including Salaries of government workers，expenditures on public works and national defense, etc.

2) Transfer payments are not included as part of the government purchases component of GDP.

a) Transfer payments are actually negative taxes representing payments from the government to individuals (with no good or service provided in return)

b) In GDP accounting, government purchases excludes transfer payments, such as Social Security or unemployment insurance benefits.

e. Definition of net exports(NX ) : spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).

*if a consumer spends $100 on a DVD player imported from Japan, that $100 counts in “consumption,” and subtract off that $100 import so that GDP ends up including the value of only domestically-produced goods and services.