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# Components of GDP

AP.MACRO:
MEA‑1 (EU)
,
MEA‑1.A (LO)
,
MEA‑1.A.3 (EK)
When using the expenditures approach to calculating GDP the components are consumption, investment, government spending, exports, and imports. In this video, we explore these components in more detail. Created by Sal Khan.

## Want to join the conversation?

• Does each company have economists who calculate GDP or is it done by the government?
And if it is done by the government how do they know what is the value of products which are only intermediate stages of other products?
• GDP is calculated on a quarterly basis (every 3 months) and presented in the National Income and Products Accounts (NIPA) by adding up both the total expenditures of the country and the total income of the country through double entry accounting. The NIPAs report two numbers (though theoretically they should be the exact same because income = expenditure), that reflect the total value of all expenditure or income in those 3 months multiplied by 4, and adjusted for seasonal differences between the different times of year. NIPAs are published by the Bureau of Economic Analysis of the Department of Commerce. So yes it is the government.

As to your second question, the government can differentiate between intermediate and final products by looking at who the goods are being sold to. As a general rule, if the goods are being sold to a firm, then it is an intermediate product and if they are being sold to households then they are a final product. You have to be careful with the firm side of things though because the products being sold to firms could also be considered investment if the product is capital (such as a piece of machinery). An example of this would be the production of a car. A car manufacturer buys materials such as metal, leather, plastic, etc. to be used in the production of the car. The purchase of these materials by the manufacturer would not be counted in the GDP because they will be directly used in the production of their new car. The value of these materials will be incorporated into the final cost of the car when the manufacturer sets his price and when the new car is sold to a consumer, we count the final cost of the car in GDP. This cost of the car would then include labor, raw materials, and whatever intermediate products that went into its production. I know this was long-winded, but I hope it helps!
• Wait so I'd like to clarify something. Initially the household expenditure (HH exp) on goods and services was considered a way to measure GDP. This was HH exp = Revenue (by firms) = Profit+ Investments(wages/rent etc). If each of these are good measures of GDP then won't adding them all together create duplicates as we do in this "Expenditures equation" for GDP? It appears here we are adding Firm investments and HH consumption on goods and services together which doesn't make sense to me. Clarification would be most appreciated.
• The question to be asked is - "If GDP is the total expenses in an economy, then who are all incurring those expenses?"
In the earlier model all the consumption was done by households only. But in reality firms do spend some money on the things they need to produce. They spend money mainly on two types of goods and services: 1. For raw materials for producing the current products: which is accounted in the household consumption as a final product
2. For equipment and other resources: Which is an investment and also an expenditure, hence counted.
• if example Apple makes its ipads in China and then sells it in US.Are the ipads considered imports?
• Yes, a certain portion of the final sale price of the iPad is counted in imports(M), but the retail sale amount is added in Consumer goods and services(C)
• When was the last time the USA had a positive "net export" for the year?
Since then the absolute value of the negative net exports was growing constantly, especially during booms, and there were some reductions during recessions. Actually, it's not that bad, because, as far as I understand, it indicates about higher standards of leaving in the US. For instance, if USA wants to import Chinese furniture, it's not because Americans cannot produce furniture, but because the salaries in China are much lower, so it's chipper to produce it in China and to be consumed by Americans with lower price that as if it were produced in the USA. But of course the question is not that simple, there are also downsides of negative net exports.
• so BMW's that are bought in America are assembled in BMW factories in South Carolina. The parts for assembly are made in Germany. Thus, since BMW is foreign car company, would American BMW purchases go toward GDP?
• A guess here: The parts would be considered imports, but the assembled car would be household consumption. It's likely that the price paid for the car would be marked up over the cost of the parts, and since this model views GDP as the market value of products, that markup would add to the GDP even after the value of the parts are removed by subtracting imports.
• At , is the purchasing of bonds or stocks by a company considered to belong to the category of "investing to make future goods and services" ?
• This is a common misconception for students, since people frequently use the word "investments" to refer to such financial assets transactions. In formal macroeconomics teaching, however, any such transactions -- even by a company -- are not considered Investment for GDP purposes, as they are not actually purchasing final goods or services used "to make future goods and services". The financial transactions are instead simply transferring money (in some form) between two entities.
• Why we add exports? Isn't it our income? I thought that import is our expenditures and therefore when calculating GDP by expenditures we should add import and subtract export.
• GDP is the market value of everything that was produced within a country in a year or any other given period of time. It is not the value of expenditures accumulated by the people of the country. It is the value of all the goods and services that were produced within that country. When we import, we use our money to buy goods that were produced in other countries (contributing to those other countries' GDP). When we export, we sell goods and services that were produced in our country to the interested party of another country. That is the reason why we subtract total imports from exports. Think of it as a leakage and injection of value of goods, not money :)
• What about wages, do wages, that firms are paying to employees, are included into Investment (3'20" on the video) ? Thanks
• There are different methods of computing GDP. In this method, no, wages are not counted, because this wages later are used by employees to consume final goods, if it included, that would have been double counting. The only exception is when the employee works for government. Then his/her salary is counted as government expenditure.