ECN400 –Module Four – Gross Domestic Product
Gross Domestic Product (GDP) is a macroeconomic indices that measures the “market value of all final goods and services produced within a country in a given period of time (Mankiw, 2012, p. 198).” There are four components of GDP (Y); consumption (C), investment (I), government purchases (G) , and net exports (NX).
The formula to derive GDP is Y = C + I + G + NX.
The largest component of GDP in consumption. This component tracks consumer household spending. When a household makes purchases of goods and services (excluding new housing), they contribute to the GDP component for consumption. When I purchase final durable or non-durable goods and services in a given period, I contribute to the consumption component of GDP in that period. Collectively, the more we spend on goods and services, the more we contribute to GDP growth. If households reduce their overall demand for goods and services, we could see a reduction in GDP if all other components remain the same.
As a specific example, if I purchase a new blouse, the market value of that blouse is included in the GDP component for consumption. My ability to purchase a new blouse contributes to a better quality of life.
The component investment includes spending on capital equipment, inventories, structures, and new housing for use in the future to produce other goods and services (Mankiw, 2012). As a specific example, when a firm purchases equipment to use in the manufacturing of clothing, the equipment is included in the GDP component for investment.
The component government purchases, includes spending on goods and services by our government, whether local, state or federal (Mankiw, 2012). As a specific example, I work as a budget analyst for the Veterans Health Administration , a federal agency. My salary is paid for by the federal government. The wages paid to me by the federal government during the current GDP period, which allowed me the income to afford the new blouse, are included in the GDP component for government spending.
The component net exports equals to the spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by...