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 (GDP) are personal consumption (60%), business investment (17%), government spending (17%), and net exports (-3%). 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 BEA (Bureau of Economic Analysis) divides U.S. GDP into the four components:

1. Personal Consumption Expenditures

Nearly 70% 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. The second is non-durable goods, such as food, clothing and fuel. The retailing industry is a critical component of the economy since it delivers all these goods to the consumer. Here's the latest retail sales statistics.

Services are nearly half of U.S. GDP. That's much more than the 30% it contributed in the 1960s. Thank the dramatic increase in banking and health care.

Most services are consumed here at home, as services 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 17% of GDP. It's also growing. 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. 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, since these structures were counted as contributing to the 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 reached its peak in 2005 when it added $775 billion to GDP. It didn't hit bottom until 2011 when only $338.7 billion was added. Housing's contribution to GDP plummeted from 6.1% to 2.2% during this time. Residential construction rebounded to $530 billion or 3% of GDP in 2015.

Combined, commercial and residential real estate construction contributed $1.195 trillion, or 8.9% of GDP, at its peak in 2006. It fell to a low of $716.9 billion in 2010, or 4.9% of GDP. In 2015, it was $.99 trillion, or 6% of GDP.

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% of GDP.

In 2006, companies added $60 billion to inventories. In 2007, they only added $29 billion. After the 2008 financial crisis hit, businesses subtracted $41 billion from their inventories, and withdrew another $160 billion in 2009. Economists knew the recession was really over in 2010, when businesses added $66.9 billion to inventory. In 2014, inventories rose $77 billion to prepare for the holiday shopping season.

An increase in inventories in 2013 led to an economic contraction in 2014. Businesses added $111.7 billion to inventories, nearly double the prior year. This was to prepare for the holiday shopping season. However, this caused a problem in 2014, since growth didn't continue. That's because companies, once again, drew down from this high inventory level since demand wasn't there. In fact, slow retail sales in the latter half of 2013 kept businesses from adding to inventories, and the fierce winter storms further depressed demand, leading to an economic contraction in the first quarter of 2014.

3. Government Spending

Government spending is 17% of total GDP. That about the same as it was in 2000. It's less than the 19% 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 $1.1 trillion. Nearly two-thirds of this was military spending. On the other hand, state and local governments can't spend more during a recession. They are usually mandated to balance their budgets, and so must cut spending when tax revenues drop. Now that the recession is over, state and local government contributions are rising.

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.

In 2015, imports subtracted $2.66 trillion, while exports added $2.12 trillion. As a result, international trade subtracted $540 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 (2015)

ComponentAmount (trillions) Percent  
Personal Consumption   $11.21  69%
   Goods     $3.97  24%
       Durable Goods     $1.50    9%
       Non-durable Goods     $2.44  15%
  Services     $7.24  44%
Business Investment     $2.87  18%
   Fixed     $2.77  17%
      Non-Residential     $2.20  13%
         Commercial       $.45    3%
         Capital Goods     $1.07    7%
         Intellectual (Software)        $.68    4%
      Residential       $.56    3%
   Change in Inventories       $.10    1%
Net Exports      ($.54)   (3%)
   Exports     $2.12   13%
   Imports     $2.66   16%
Government     $2.88   18%
   Federal     $1.11     7%
     Defense       $.67     4%
  State and Local     $1.74    11%
TOTAL GDP   $16.35  100%


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