Components of Gross Domestic Product (Essay Sample)

COMPONENTS OF GROSS DOMESTIC PRODUCT
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Gross domestic product refers to the monetary value of the total end produce of goods and services in a given country during a particular period of time (Mankiw, Principles of Maroeconomics, 2012). GDP is usually computed on yearly basis. It constitutes of both private and public expenditure, government expenditure, investments and imports less goods brought from other countries into a given country (Mankiw, Principles of Maroeconomics, 2012). The four components of GDP are therefore; consumption, government expenditure, investments and net exports. When using the expenditure approach to compute GDP, its formula is usually expressed as follows: GDP = Consumption (C) + Government expenditure (G) + Investment (I) + Net exports (N).
Consumption is the major constituent of GDP and comprises of the personal consumption expenditure items (Mankiw, Principles of Economics, 2012). These items are further divided into long-lasting goods, short-lived goods and services. Food, rent, electricity and medical expenses are examples of household consumption (Mankiw, Principles of Economics, 2012). The value of consumption is not affected by the value of imported items (Mankiw, Principles of Economics, 2012). In modern day world, consumption has gone up due to the increased cost of living in many parts of the world. To access quality medical care and descent housing today, one has to dig deeper into their pockets.
Government expenditure refers to the expenses incurred by the government on the finished goods and services (Mankiw, Principles of Maroeconomics, 2012). Transfer payments such as welfare (social security) and unemployment payouts do not constitute government expenditure since they don’t entail production of goods and services. Examples of government spending are; salaries and remunerations offered to public servants and officers, money spent to buy military weapons by government and any public investment expenditure incurred by the government. Increase in the cost of these services offered to citizens by the government brings about an increase in government taxation. This leads to decreased disposable income for the citizens, hence no savings and investment which leads to poverty in the long run (Mankiw, Principles of Maroeconomics, 2012). Thus, government spending has a major effect on individual personal development and growth.
Investment includes gross private domestic investment. It is divided into fixed assets and variations in business inventories (Mankiw, Principles of Maroeconomics, 2012). It comprises of the net private domestic investment (NPDI) and consumption of fixed capital. NPDI refers to part of the entire investment that which contributes to the prevailing inventory of structures and capital (Mankiw, Principles of Maroeconomics, 2012). Utilization of fixed capital constitutes loss in value and a provision for unplanned destruction to the state&...