Last Wednesday I introduced a simple equation that defined the Gross Domestic Product [GDP] in terms of five different components of demand for goods and services. The equation was as follows:

GDP = C + I + (X - M) + G

where C = Personal Consumption Expenditures, I = Gross Private Domestic Investment, X = Exports of Goods and Services, M = Imports of Goods and Services, and G = Government Spending.

Today I'm going to identify to what degree each of these components contributes to the overall magnitude of the GDP. In some cases the components will be broken down into constituent elements to provide a better defined picture. The figures in the following listing are so-called Real GDP figures. That is, they are adjusted for inflation by being expressed in terms of 1987 dollars. All figures are expressed in billions of dollars and represent annual rates at the end of the second quarter of 1995.

Gross Domestic Product 5,487.8 (100.00%)

Personal Consumption Expenditures 3,674.3 (66.95%)

Gross Private Domestic Investment
Nonresidential Fixed Investment 763.7 (13.92%)
Residential Fixed Investment 221.2 (4.03%)
Change in Business Inventories 34.3 (0.60%)
Exports Minus Imports -126.7(-2.28%)

Government Purchases
Federal
National Defense 215.0 (3.92%)
Non-Defense 109.8 (2.00%)
State and Local 596.2 (10.86%)

Examination of this data reveals that, far and away, spending by consumers is the largest component, accounting for 67% of the GDP. A distant second is investment by businesses in facilities and equipment, at about 14%. Ranking third is purchases by state and local governments at approximately 11%. And, despite all hoopla these days about cutting spending by the federal goverment, that spending only constitutes about 6% of the GDP total.

You might want to stick a copy of the above listing on the wall next to your computer. This will help to put some of these figures into perspective when we discuss their month-to-month changes here on Economic Indicators.

Byline: Lafferty (MF Merlin)