Detailed Explanation of GDP Components - Video Tutorials & Practice Problems

Consumption

All right now, let's go into a little more detail for each of the four components of GDP consumption. Investment, government purchases and net exports. So let's start here with consumption. Remember that consumption? This is spending by households on goods and services. Right. Goods and services. So, we're gonna break out what this consumption is into these three categories. First, there's the services that get purchased and then we break up goods into non durable and durable goods. So services are basically intangible acts that are being um, used up by the consumer. Right? So you're gonna buy something that's not tangible, You can't hold it in your hand, like this pen or a computer, right? These aren't goods, their services, that someone's doing something for, you, compare that with goods. So we break goods up into two categories where there is something tangible, where nondurable goods? Well, these are products where we say they have less than three years of expected life and durable goods are products with more than three years of expected life. Okay, so let's go through some simple examples here of a service. What would be a service? A service would be maybe getting a haircut? Right, There's nothing tangible. You can hold about a haircut, but it's a service that's being provided to you. How about hiring a lawyer or an accountant? Right, They're providing a service for you, uh, by helping you in this law case or something or what about a tutor? A tutoring service is also considered a to a service here because there's no tangible good. You're just getting smarter up here. Cool, how about some non durable goods? So what are some things that don't last a long time? Well, a very good example here would be food. Maybe shoes. I know I can wear my shoes for more than three years, but sometimes my big toe starts to come out the front. But for the most part, shoes are going to be called a nondurable good here. Food shoes and a very good example of a durable good that gets purchased by household, maybe a car, a washing machine, things like that. Things that are gonna last for quite a long time. Right, A computer, maybe, um, things like that. Okay, so nondurable goods, durable goods and services. So, the big thing to remember there is that three year threshold for non durable and durable. But for the most part, you can probably make a logical guess as to what's gonna be nondurable compared to a durable good. Okay, let's go ahead and pause here and then we'll move on to investment in the next

Investment

All right, let's move on to investment now. So investment. Remember this isn't like financial investments in stocks and bonds. This is big investments on like capital equipment, inventory, structures, things that are gonna last quite a few years here. Right, big big things here now, um we break this up into three categories here. So the business spending is gonna be the business fixed investment, then we've got that residential investment. And remember how we talked about households buying new houses. Well, that was included investment and then we've got changes in inventory. Let's go through these one by one here. So business fixed investment. Well, this is spending on how we said, like new factories, buildings, equipment to produce goods. So this is increasing future production by buying these things today. Right, we're building new factories. Were buying buildings. These are things that are going to increase our productivity in the future. The next is those residential investments. Remember spending by households and firms on new homes. So it's it's you got to be clear that we're purchasing new homes here, new construction, not purchasing homes that were built in other years and now being resold as a secondhand sale. Okay, so this includes both single family or multi unit homes. This is the key here, is that their new construction this year? So just like I said, resale of previously constructed are not included. Cool, Finally, we have changes in inventory. So this is the last part of the investments here and changes in inventory. Remember when a business holds inventory. So they have goods that they haven't sold yet. Well, remember those goods that are sitting in inventory? They were produced in another year. So if the inventory decreases during the year, well that means we're selling other years production, right? We're getting rid of inventory. We're getting rid of things that we produced in other years. That should decrease our investment here. Where if we increase our inventory, if we're building more and more of something and increasing our inventory, well, we increased what was produced during this year. So it should increase our investment. So let's look through this example right here, notice that it can be positive or negative. So let's go through the the example, Sony had 100 million of unsold televisions at the beginning, the beginning of the year in this example. So it started in the left hand box and then by the end of the year they had only 20 million of unsold televisions. So what happened to their inventory? Did it increase or decrease during the excuse me? During the year? They started at 100 million And they ended at 20 million. So they had an 80 million change. And was it an increase or decrease? Well, the inventory decreased throughout the year, right, decrease in inventory. So what would happen to investment? The decrease in inventory? Would that lead to an increase or a decrease in investment? This is a decrease in an investment, right, because we're selling stuff that we sold that we produced in other years. If we're decreasing our inventory remember we had 100 million of televisions at the beginning of the year we had produced those in other years and now there's only 20 million of it left those 80 million that we sold well it would have been counted as consumption, right? Things that got sold during the year. However we didn't produce them this year. So we need to get rid of that out of our GDP calculation. So it would decrease investment. Okay. A decrease in inventory decreases investment. Now look on the other side of the coin let me scroll up a little bit is an increase. Right? So at the beginning of the year they had 100 million but by the end of the year there was 100 and 60 million of unsold televisions. So clearly there was an increase in an inventory, right? There's 100 million -160 That leaves us with 60 and I just did. Beginning minus ending. Kind of silly but you can clearly see that this is a 60 million increase to inventory. Right? They started with 100 they got to 160. So that's a 60 million increase in the inventory. And what do we see in this case? The increase in inventory would increase investment by the same logic. Right we produce these things this year. So they should be included in the G. D. P. Of this year even if they haven't been sold yet. Cool. So the last but not least we've talked about this before. But remember that the financial transactions like stocks and bonds are not included in investment, they are not part of investment. Even though in your head you might be thinking investments in our stocks, bonds, mutual funds, those types of things. Those are financial investments. Here. We're talking about economic investments, we're taking an economics class. We're focused on economic investment. Cool. So that's about it for investment. Let's go ahead. And in the next video we're just going to review some stuff about government purchases, net exports and we'll wrap this.

Government Purchases and Net Exports

Alright, so there's not much more details. We need to go on here, but let's go ahead and review this. Just so we have it all in one place. Government purchases spending on goods and services, by who? By the government, Right, Local, state and federal government. They're the ones who make the government purchases pretty straightforward. And remember, just to reiterate that this does not include transfer payments. So when the government transfers money to other citizens, uh so through, let's say a welfare check or an unemployment check that does not get included in GDP, it gets included when that gets spent on consumption. Right? So the money, when it gets received by by the by the households, they're gonna spend it on goods and services, and then it will be included in the consumption category category, not in the government purchases category. The welfare check itself does not result in production only when it gets spent on the final goods and services. Does it result in production? So, again, exports, exports minus imports, Right, exports minus imports. And remember that this could be it could be positive or negative if the imports are greater than exports, Well, we're gonna have a negative number there. Right. If we've got a trade deficit in that case, if the imports are greater than exports. So, exports remind me again, goods produced, where are they produced here? Or abroad, exports are goods that are produced here, but sold abroad right there, sold in other countries. And what about imports? Those are goods sold abroad. Excuse me. Goods that are produced abroad in other countries, but sold here. Right. Those are imports. Cool. So, remember those are the four sections of our GDP again, GDP equals consumption plus investment, plus government purchases, plus net exports. Okay, there we go. There we have it a little more detail on the different sections of g D. P. The main thing I want you to remember here is this formula for G. D. P. What is included through the expenditure approach. Cool. Let's pause here and move on to the next topic.