GDP Critical Thinking Macroeconomic Data

GDP

Critical Thinking Macroeconomic Data

Four components of GDP

Four components of GDP

The first component of a nation's GDP (Gross Domestic Product) is Consumption (C). Consumption, quite simply, measures the amount of durable and nondurable goods and services consumed by individuals (Kaplan 1999). No individual can live without consuming something, whether that entails buying a new washing machine like a durable good, purchasing clothing (a nondurable good) to wash in that machine, or getting a winter coat dry-cleaned (a service). When individuals within the nation consume less, production in the nation as a whole slows down. Inventories build up, and people are laid off, causing the economy to enter a recession. Conversely, when people consume more, businesses begin to hire new workers to produce more goods and services.

Businesses also begin to invest more during boom times, and Investment (I) is another building-block of GDP. Business investments include "the actual purchases of goods used in the production process. Business investment includes the construction of new offices and factories, and the purchase of machinery, computers, and any other equipment used to assist labor in the production of goods and services" including replacing worn-out machinery (Kaplan 1999). Replacing worn-out machinery is called a gross investment, but improvements upon existing machinery or expansion 'add' to the nation's economy. To correct for the non-revenue enhancing nature of replacing depreciated assets, gross investment is subtracted from total business investments when calculating GDP (Kaplan 1999). The construction of new homes and changes in inventories -- "goods held in inventories are counted for the year produced, not the year sold" also constitute investments (Kaplan1999). Inventories are an important indicator, as increases in inventories indicate a possible recession. If a worker is working for a firm and sees inventories increasing, he or she should be worried.

During the current recession, government spending has become an increasingly important way to fuel growth in the nation's GDP. Government spending (G) may include stimulus packages, investments in infrastructure, or defense spending. The taxpayer funds such spending, but also benefits from such spending. By giving people jobs and hiring private contractors, the government generates more wealth. The newly-employed purchase more goods and services, which has an overall positive effect on the economy. For example, even if a citizen is employed at a grocery store, if workers on a government project have more money to spend and buy more food, the grocery store and its employees can become more financially secure, and escape the grip of the recession.