The four components ofgross domestic productare personal consumption, business investment, government spending, and net exports. These four components tell you what a country is good at producing and how robust its overall economy is.
Annual GDP is the country's total economic output throughout the year. It's effectively a measure of what is being spent in that economy.The only exception is the shadow orblack economy, which is not officially recorded or taxed and therefore doesn't count toward GDP.
Key Takeaways
- GDP is the sum of all the final expenses or the total economic output of an economy within a specified accounting period.
- It does not include the output of its underground economy, which is the portion left unrecorded and untaxed.
- The U.S. uses four major components to calculate GDP: personal consumption expenditures, business investment, government expenditures, and net exports
- Consumer spending generally comprises close to 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.
In other words, GDP is the sum of consumption (C), investment (I), government spending (G), and net exports (NX), which are imports minus exports.
In 2023,U.S. GDPwas 68% personal consumption, 18% business investment, 17% government spending, and negative 3% net exports.
Here's how theBureau of Economic AnalysisdividesU.S. GDP into these four components.
1.Personal Consumption Expenditures
Consumer spending generallycontributesalmost 70% of the total United States production. In 2023, that was $18.6trillion.Theyare rounded to the nearest billion. The BEA sub-divides personal consumption expenditures into goods and services.
Note
Personal consumption expenditures include durable goods such as cars, furniture, and large appliances; non-durable goods such as clothing, food, and fuel; and services such as banking, health care, and education.
Goods
Goods are tangible objects. They are further subdivided 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 of 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 generally contributes roughly 45% of GDP, largely thanks to 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 2023, business investments were $4.8trillion, or roughly 18% of total GDP.It's tripled since a recession low of $1.5 trillion in 2009. After that low, business investments took until 2014 to beat a 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.
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 nearly $749 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. Companies need 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. As a result, the change in private inventories is an importantleading economic indicator even though it generally contributes less than 1% of GDP.
3. Government Spending
Government spendingwas $4.7trillionin 2023. That's 17% of total GDP now but is 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 $1.8trillion in 2023. Nearly 60% wasmilitary spending. Meanwhile, state andlocal governmentcontributions were 11%.
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 2023, imports subtracted $3.8 trillion, or a little less than in 2022. Exports added $3 trillion, about the same as one year prior. As a result, international tradesubtracted $799 billion from GDP, less than the $971 billion it subtracted in 2022.
Components of Real GDP (2023)
| Component | Amount (trillions) | Percent |
|---|---|---|
| Personal Consumption | $18.6 | 68% |
| Goods | $6.2 | 23% |
| Durable goods | $2.2 | 8% |
| Nondurable goods | $4.0 | 15% |
| Services | $12.4 | 45% |
| Business Investment | $4.8 | 18% |
| Fixed investment | $4.8 | 18% |
| Nonresidential | $3.7 | 14% |
| Structures | $0.8 | 3% |
| Equipment | $1.4 | 5% |
| Intellectual property products | $1.5 | 5% |
| Residential | $1.1 | 4% |
| Change in private inventories | $0.1 | 0% |
| Net Exports | -$0.8 | -3% |
| Exports | $3.0 | 11% |
| Goods | $2.0 | 7% |
| Services | $1.0 | 4% |
| Imports | $3.8 | 14% |
| Goods | $3.1 | 11% |
| Services | $0.7 | 3% |
| Government Spending | $4.7 | 17% |
| Federal | $1.8 | 6% |
| National defense | $1.0 | 4% |
| Nondefense | $0.8 | 3% |
| State and local | $3.0 | 11% |
Frequently Asked Questions (FAQs)
What is a good GDP?
There is no set "good GDP," since each country varies in population size and resources. Economists typically focus on the ideal GDP growth rate, which they generally agree is between 2% and 3% per year. If a country's GDP is growing at this rate, it will usually reap the benefits of economic growth without the downsides of excessive inflation. It's important to remember, however, that a country's economic health is based on myriad factors.
What is the difference between nominal GDP and real GDP?
Nominal GDP does not adjust for inflation, while real GDP does. That makes real GDP a more accurate measure of economic change over time.
What country has the highest GDP?
The U.S. has the highest total GDP, according to the World Bank. However, the U.S. only ranks 12th in terms of GDP per capita, which compares a country's economic output to its population. Monaco has the highest GDP per capita.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Federal Reserve Bank of St. Louis. "Graphing GDP Components With Our New Release View."
Corporate Finance Institute. "GDP Formula."
Bureau of Economic Analysis. “National Income and Product Accounts Tables," Download "Table 1.1.5. Gross Domestic Product."
The World Bank. "GDP (Current US$)."
The World Bank. "GDP per Capita (Current US$)."
