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Overview: The four major components used for calculating the GDP

Why GDP is a country's most comprehensive economic scorecard (Part 4 of 8)

(Continued from Part 3)

The four major components

The four major components that go into the calculation of the U.S. GDP, as used by the Bureau of Economic Analysis, U.S. Department of Commerce are:

  • Personal consumption expenditures

  • Investment

  • Net exports

  • Government expenditure

While calculating the GDP estimate, the Bureau first takes into account the sum of an individual’s personal consumption expenditures, that is, durable goods (such as furniture and cars), non-durable goods (such as clothing and food), and services (such as banking, education, and transportation).

Following personal consumption expenditures, the Bureau takes into account, sum of investments in private housing purchases (or residential investment), and businesses investment in non-residential structures, durable equipment, and computer software. Inventories at all stages of production being treated as investment, changes in the inventory levels are also added to GDP.

The direction and course of investments in the housing and the industrial sector is also reflected in the performance of real estate ETFs like the Vanguard REIT ETF (VNQ) and the iShares Dow Jones US Real Estate Index Fund (IYR), and industrials ETFs like the SPDR Industrial Select Sector Fund (XLI), which has companies like General Electric Corporation (GE) and Boeing Corporation (BA) in its portfolio.

Next, the GDP accounts for the amount of net exports. Net exports equal the sum of exports less imports. Exports are the purchases of goods and services produced in the U.S. made by foreigners. These add to the GDP. Imports represent domestic purchases of foreign-produced goods and services. So, they must be deducted from the calculation of GDP. In the U.S., net exports are a drag on total GDP because the country regularly imports more than it exports, that is, net exports are in deficit.

The government component of the GDP accounts for the central government expenditure in national defense and non-defense, as well as State and local government’s expenditure estimates. Government purchases of goods and services are a compensation of government employees and purchases from businesses and abroad. However, government outlays for transfer payments or interest payments are not included in the GDP calculation.

Continue to Part 5

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