Components of GDP: Explanation, Formula and Chart

4 Critical Drivers of America's Economy

Personal consumption, a component of gdp
Personal consumption is the largest component of GDP. Photo by Bobby Bank/WireImage

Definition: The components of gross domestic product are personal consumption (60 percent), business investment (17 percent), government spending (17 percent), and net exports (-3 percent). That tells you what a country is good at producing. That's because GDP is the country's total economic output for each year. It's equivalent to what is being spent in that economy. 

The formula to calculate the components of GDP is Y = C + I + G + X.

 That stands for:  Y (GDP) = Consumption + Investment + Government + X (net exports, or imports minus exports.)

Components of GDP Explained

Here is how the Bureau of Economic Analysis divides U.S. GDP into the four components:

1. Personal Consumption Expenditures

Nearly 70 percent of what the United States produces is for consumer spending. The BEA sub-divides personal consumption expenditures into goods and services. 

Goods are further sub-divided into two even smaller components. The first is durable goods, such as autos and furniture. These are items that have a useful life of three years or more. The second is non-durable goods, such as fuel, food and clothing. The retailing industry is a critical component of the economy since it delivers all these goods to the consumer. The BEA uses the latest retail sales statistics as its data source. Since this report comes out monthly, it gives you a preview of this component of the quarterly GDP report.

Services are nearly half of U.S. GDP. These include commodities that cannot be stored and are usually consumed when purchased. It's much more than the 30 percent it contributed in the 1960s. Thank the expansion in banking and health care. Most services are consumed in the United States. They are difficult to export.

 

Why does personal consumption make up such a large part of the U.S. economy? America is fortunate to have a large domestic population within an easily accessible geographic location. It's almost like a huge test market for new products. That advantage means that U.S. businesses have become excellent at knowing what consumers want. 

2. Business Investment

Business investment includes purchases that companies make to produce consumer goods. However, not every purchase is counted. If a purchase only replaces an existing item, then it doesn't add to GDP and so isn't counted. It's 16 percent of GDP. It's down one percentage point since 2015. But it's double its recession low of $1.5 trillion in 2009. In 2014, it beat its 2006 peak of $2.3 trillion. The BEA divides business investment into two sub-components: Fixed Investment and Change in Private Inventory. 

Most of Fixed Investment is non-residential investment. That consists primarily of business equipment, such as software, capital goods, and manufacturing.

The BEA bases this component on shipment data from the monthly Durable Goods Order Report. That makes it a good leading economic indicator.

A small but important part of non-residential investment is commercial real estate construction. The BEA only counts the new construction that adds to total commercial inventory. Resales aren't included. The BEA added them to GDP in the year they were built. 

Fixed investment also includes residential construction, which includes new single-family homes, condos and townhouses. Just like commercial real estate, the BEA doesn't count housing resales as contributing to GDP. ​New home building was $710 billion in 2016, or 4 percent of GDP. Combined, commercial and residential real estate construction was 1.2 trillion, or 6 percent of GDP.

The 2008 financial crisis burst the bubble in housing. Residential construction reached its peak in 2005 when it added $872 billion to GDP, adjusted for inflation. It didn't hit bottom until 2010 when only $382 billion was added. Housing's contribution to GDP plummeted from 6.1 percent to 2.6 percent during this time. Residential construction rebounded to $592 billion in 2016. That's 3.6 percent of GDP. Comparisons over time are always adjusted for inflation.

Combined commercial and residential construction contributed $1.3 trillion, or 9.1 percent of GDP, at its peak in 2005. It fell to a low of $748.7 billion in 2010, or 5.1 percent of GDP. In 2016, it was $1 trillion, or 6.2 percent of GDP, adjusted for inflation.

Change in Private Inventory is how much businesses order to increase the inventories of the goods they are planning to sell. When orders for inventories increase, it usually means that companies are receiving orders for goods they don't have in stock, and so are ordering more to have enough on hand. It's important for companies to have enough inventory so they don't disappoint and turn away potential customers. These customers may find what they need elsewhere and never return. Therefore, a business would rather have just a little too much on hand than not enough. Therefore, an increase in private inventories is a contribution to GDP.

A decrease in inventory orders usually means that businesses are seeing demand slack off. As inventories build, companies will cut back production. If it continues long enough, then layoffs are next. Therefore, the change in private inventories is an important leading indicator, even though it contributes less than 1 percent of GDP.

3. Government Spending

Government spending is 18 percent of total GDP. That about the same as it was in 2000. It's less than the 19 percent it contributed in 2006. In other words, the government was spending more when the economy was booming. That's exactly when it should have been spending less to cool things off. Slower spending now is a result of sequestration, which was also timed poorly. Austerity measures shouldn't be used when the economy is struggling to recover. 

The Federal Government added $1.24 trillion in 2016. Almost 60 percent was military spending. State and local government contributions rose to 11 percent. Their revenues improved now that the recession is over. They can't spend more during a recession. They are mandated to balance their budgets. They must cut spending when tax revenues drop. 

4. Net Exports of Goods and Services

Imports and exports have opposite effects on GDP. Exports add, while imports subtract, from GDP. The United States imports more than it exports, creating a trade deficit. That's because America still imports a lot of petroleum, despite gains in domestic shale oil production. The U.S. service-based economy is difficult to export. For more, see Import and Export Components. (Source: "Concepts and Methods of the U.S. National Income and Product Accounts," Bureau of Economic Analysis, October 2016.)

In 2016, imports subtracted $2.73 trillion, while exports added $2.23 trillion. As a result, international trade subtracted $500 billion from GDP. (Source: U.S. Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.1.5., Gross Domestic Product.  Note: The figures reported are real GDP, and are rounded to the nearest billion. For the latest revisions and more detail, please use the BEA tables.) 

Components of GDP Chart (2016)

ComponentAmount (trillions) Percent  
Personal Consumption   $12.75  69%
   Goods     $4.10  22%
       Durable Goods     $1.40    8%
       Non-durable Goods     $2.70  15%
  Services     $8.65  47%
Business Investment     $3.04  16%
   Fixed     $3.02  16%
      Non-Residential     $2.31  12%
         Commercial       $.49    3%
         Capital Goods     $1.06    6%
         Intellectual (Software)        $.76    4%
      Residential       $.71    4%
   Change in Inventories       $.02    0%
Net Exports      ($.50)   (3%)
   Exports     $2.23   12%
   Imports     $2.73   15%
Government     $3.28   18%
   Federal     $1.24     7%
     Defense       $.73     4%
  State and Local     $2.03    11%
TOTAL GDP   $18.56  100%

 

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