Gross Domestic Product (GDP)

GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year. GDP is sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X-M).

Y = C + I + G +  (X – M)

(or)

Y = PFCE + GFCF + GFCE + NX

Consumption(PFCE): Consumption is consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non – durable goods, and services. Some examples are consumption expenditure in food, rent, jewellery, gasoline, and expenses.

Investment(GFCF): This includes construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment.

Government Spending(GFCE): Government spending is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. However, it does not include any transfer payments, such as social security or unemployment benefits.

Exports and Imports(NX): X (exports) represents gross exports, GDP captures the amount a country produces, including goods and services produced for other nations’ consumption. Therefore, exports are added. M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms C, I or G, and must be deducted to avoid counting foreign supply as domestic.

Intermediate goods are not included in the calculation of national income. Only final goods are included in the calculation of national income because value of intermediate goods is included in the value of final goods. If it is included in national income it will lead to the problem of double counting.