The four components ofgross domestic productare personal consumption, business investment, government spending, and net exports. That tells you what a country is good at producing. GDP is the country's total economic output for each year. It's equivalent to what is being spent in that economy.The only exception is the shadow orblack economy.
Key Takeaways
- GDP is the sum of all the final expenses or the total economic output by an economy within a specified accounting period.
- It does not include the output of its underground economy.
- The BEA uses four major components to calculate U.S. GDP: personal consumption expenditures, business investment, government expenditures and net exports
- Consumer spending comprises 70% of GDP.
- The retail and service industries are critical components of the U.S. economy.
GDP Formula
The formula to calculate the components of GDP isY = C + I + G + NX.That stands for:GDP = Consumption + Investment + Government + Net Exports, which are imports minus exports. In 2019,U.S. GDPwas 70% personal consumption, 18% business investment, 17% government spending, and negative 5% net exports.
Here's how theBureau of Economic AnalysisdividesU.S. GDP into the four components.
1.Personal Consumption Expenditures
Consumer spendingcontributesalmost 70% of the total United States production. In 2019, that was $13.28trillion.Note that the figures reported arereal GDP. It's the best way to compare different years. Theyare rounded to the nearest billion. The BEA sub-divides personal consumption expenditures into goods and services.
Note
Personal consumption expenditures include:
- Durable goods—cars, furniture, large appliances
- Non-durable goods—clothing, food, fuel
- Services—banking, health care, education
Goods
Goods are tangible objects. They are further sub-divided into two even smaller components. The first isdurable 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 asfuel,food, andclothing. Theretailing industryis a critical component of the economy since it delivers all these goods to the consumer.
Services
Services are paid aid, help, or information. Most are non-tangible, but the BEA also includes commodities that cannot be stored and are consumed when purchased. It contributes 45% of GDP. Thank the expansion inbankingand health care. Most services are consumed in the United States because they are difficult to export.
Note
The BEA uses thelatest retail sales statisticsas its data source. Since this report comes out monthly, it gives you a preview of this component of the quarterly GDP report.
Why does personal consumption make up such a large part of the U.S. economy? America isfortunate 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
The business investment includes purchases that companies make to produce consumer goods. But not every purchase is counted. If a purchase only replaces an existing item, then it doesn't add to GDP and isn't counted.Purchases must go toward creating new consumer goods to be counted.
In 2019, business investments were $3.42trillion. That's 18% of U.S. GDP.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.
Fixed Investment
Most fixed investmentis non-residential investment. That consists primarily of business equipment, such as software,capital goods, andmanufacturing equipment. The BEA bases this component on shipment data from the monthlydurable goods order report. It’s a goodleading economic indicator.
A small but important part ofnon-residentialinvestment iscommercial real estateconstruction. The BEA only counts the new construction that adds to total commercial inventory. Resales aren't included. The BEA adds 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 commercialreal estate, the BEA doesn't count housing resales as fixed investments.New home building was $594billion in 2019 or 3% of GDP. Combined, commercial and residential construction was $1.11 trillionor 5.8% of GDP.
Note
The2008 financial crisisburst the bubble in housing.In 2005, residential construction peaked at $872billion or 6.1% of GDP.In 2010, it bottomed at $382billion or 2.6% of GDP. Combined commercial and residential constructionwas$1.3 trillion or 9.1% of GDP in 2005.It was $748.7 billion, or 5.1% of GDP, in 2010.
Change in Private Inventory
The change in private inventory account measureshow much companies add to the inventories of the goods they plan to sell. When orders for inventories increase, it means companies receive orders for goods they don't have in stock. They order 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. An increase in private inventories contributes to GDP.
A decrease in inventory orders usually means that businesses are seeing demand slack off. As inventories build, companies will cut back on production. If it continues long enough, then layoffs are next. So, the change in private inventories is an importantleading indicator, even though it contributed less than 1% of GDP in 2018.
3. Government Spending
Government spendingwas $3.30trillionin 2019. That's 17% of total GDP.It's less than the 19% it contributed in 2006. In other words, the government was spendingmorewhen the economy was booming before the recession.
The federal government spent $1.28trillion in 2019. More than 60% wasmilitary spending.
State andlocal governmentcontributions were 11%. Although this spending rose a bit since 2017, other sectors of the economy grew faster.
4. Net Exports of Goods and Services
Importsandexportshave opposite effects on GDP. Exportsaddto GDP and importssubtract.
The United Statesimports more than itexports, creating atradedeficit. America still imports a lot of petroleum, despite gains in domesticshale oilproduction.
Services are difficult to export. In 2019, imports subtracted $3.49 trillion or a little more than in 2018. Exports added $2.53 trillion, about the same as 2017 and 2018. As a result, international tradesubtracted $950 billion from GDP, more than $920 billion it subtracted in 2018, and the $859 billion it subtracted in 2017.
Components of Real GDP (2019)
| Component | Amount (trillions) | Percent |
|---|---|---|
| Personal Consumption | $13.28 | 70% |
| Goods | $4.76 | 25% |
| Durable Goods | $1.77 | 9% |
| Non-durable Goods | $3.01 | 16% |
| Services | $8.56 | 45% |
| Business Investment | $3.42 | 18% |
| Fixed | $3.34 | 17% |
| Non-Residential | $2.74 | 14% |
| Commercial Real Estate | $0.54 | 3% |
| Capital Goods | $1.27 | 7% |
| Intellectual (Software) | $0.97 | 5% |
| Residential | $0.59 | 3% |
| Change in Inventories | $0.07 | 0% |
| Net Exports | ($0.95) | (5%) |
| Exports | $2.53 | 13% |
| Imports | $3.49 | 18% |
| Government | $3.30 | 17% |
| Federal | $1.28 | 7% |
| Defense | $0.77 | 4% |
| State and Local | $2.02 | 10% |
| TOTAL GDP | $19.07 | 100% |
(Source: Bureau of Economic Analysis. "Concepts and Methods of the U.S. National Income and Product Accounts: Table 1.1.6. Real GDP.")
Frequently Asked Questions (FAQs)
What is a good GDP?
There is no set "good GDP" since each country varies in population size and resources. Economists typically focus on the ideal GDP growth rate, which they generally agree is between 2% and 3% per year. If a country's GDP is growing at this rate, it will usually reap the benefits of economic growth without the downsides of excessive inflation. It's important to remember, however, that a country's economic health is based on myriad factors.
What is the difference between nominal GDP and real GDP?
Nominal GDP does not adjust for inflation, while real GDP does. That makes real GDP a more accurate measure of economic change over time.
What country has the highest GDP?
The U.S. has the highest total GDP. In 2020, it totaled over $20.8 trillion. However, the U.S. only ranks 12th in terms of GDP per capita, which compares a country's economic output to its population. Monaco had the highest GDP per capita as of 2019.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Federal Reserve Bank of St. Louis. "Graphing GDP Components With Our New Release View." Accessed Jan. 18, 2022.
Corporate Finance Institute. "GDP Formula." Accessed Jan. 18, 2022.
Bureau of Economic Analysis. “National Income and Product Accounts Tables," Download "Table 1.1.6. Real Gross Domestic Product, Chained Dollars." Accessed Jan. 18, 2022.
The World Bank. "GDP (Current US$)." Accessed Jan. 18, 2022.
The World Bank. "GDP per Capita (Current US$)." Accessed Jan. 18, 2022.
