The GDP refers to the market value of all services and goods a country produces at a given time (Bade, n.d.). It uses four components to measure the country’s economy i.e. consumption (C), investments (I), governments (G), and net exports (X-M) (where M are the imports and X the exports). It follows that the GDP= C+I+G+(X-M). Each of the components plays a role in the economy as described below.
Consumption
Under this category, the GDP focuses on the personal consumption expenditure. It is the most powerful component and can range between 65 to 70% of the GDP. Citizens move the economy forward by providing a market for the goods and services produced. It follows that the amount each person spends influences the amount of goods produced according to forces of supply and demand. If the demand goes low, the production of the goods reduces and vice versa. A higher GDP implies a high consumption of the goods.
The goods are usually in three categories, the durable ones, such as cars, non-durable like food, and services such as leisure expenditure. Since most communities are economically stratified, the consumer spending would point out the income distribution in the country. The wealthy tend to spend more in absolute terms especially on durable and service industry as opposed to the poor. Besides, they have higher savings on top of the consumption.
There are particular determinants of the consumption that affects and individuals directly. The first is the current income measured using wages, capital gains, and remittances. If one has higher incomes, the person contributes to the GDP more than those with the least income. The cumulative savings and expected future income based on short run credible events also play an essential role in determining the consumption of the person. In a nutshell, my lifestyle impacts the GDP as I earn and spend the money.
Investments
Under this component, the GDP measure the gross private domestic investment that traditionally contributes about 14% of the GDP. It involves nonresidential investment such as capital (real estate, and factories), resident investments (expenditure on residential equipment belonging to landlord and tenant), and change of inventories. More investments lead to more jobs that lead rise to an increase in consumption, savings, and positive growth of the economy. The investment needs to be fast to impact positively on the GDP (Piana, 2001). In this respect, a larger GDP means that I would get a job, be paid significantly more, and have the capacity to spend on more durable goods.
Government
In this category, the GDP measure the state's expenditure on goods consumed during the period of measurement. For instance, spending on the supply of gasoline and office materials, and capital investment like the construction of dams, and highways except transfer payment because they do not form part of the current production. Government spending may influence job creation and positively trigger economic growth. At the same time, expenditure on infrastructure and other critical sectors tends to increase income and consumption that lead to GDP growth. Government spending helps the citizens by providing some of the essential commodities. In this case, it can assist in subsiding the cost to increase consumption.
Net exports
The exports increase the country’s revenues. As the value of export rises, the flow of cash trigger economic growth concerning expenditure, job creation, and consumption that would lead to the growth of the GDP. A negative value would reduce the GDP growth. If this occurs, the citizens may not enjoy the economic benefits of a robust economic growth. However, the imports may provide cheaper goods that the citizens can take advantage of despite the largest share of the income going to other countries.
The GDP measurement takes into account the nation’s consumption, investments, government, and net exports. These components contribute to the growth and affect the citizens in determining their income, lifestyle, job creations, and other aspects of social lives.
References
Bade, P., (n.d.). Economics: Canada in the global environment. Retrieved on April 24, 2016 from http://web.uvic.ca/~aahoque/VIU/Chapter%2020.pdf
Piana, V., (2001). Investment. Economics Web Institute. Retrieved on April 24, 2016 from http://www.economicswebinstitute.org/glossary/invest.htm
