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GDP consists of four key components:
Personal Consumption Expenditures
Net Exports (Exports – Imports)
Thus, Gross Domestic Product is calculated by placing a monetary value on each of those four components and obtaining their sum. Let’s look closer at each of those.
Consumption is usually the largest component of the healthy economy’s GDP. It consists of a sum of all private expenditures in the economy. Those are purchases of goods (durable and nondurable) and services. Important: Purchases of new houses are not included in the calculation.
This component mostly consists of business investments in the economy. Examples of such would be construction of a new factory or purchase of equipment for one. New house purchases will also be included in this component.
It is a sum of all government expenditures on final goods and services. This component would include all salaries government pays to workers in public sector of the economy, purchases of military equipment and investment expenditures. Unemployment payments are not included here.
Net exports is a simple difference between gross exports (what country gets from selling its goods and services to other countries) and gross imports.
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