I n t h I s c h a p t e r y o u w I l L

Consumption
is spending
by households on goods and services, such as the Smiths’ lunch at Burger King.
Investment
is the purchase of capital equipment, inventories, and structures, such
as the General Motors factory. Investment also includes expenditure on new hous-
ing. (By convention, expenditure on new housing is the one form of household
spending categorized as investment rather than consumption.) 
Government pur-
chases
include spending on goods and services by local, state, and federal govern-
ments, such as the Navy’s purchase of a submarine. 
Net exports
equal the
purchases of domestically produced goods by foreigners (exports) minus the
domestic purchases of foreign goods (imports). A domestic firm’s sale to a buyer in
another country, such as the Boeing sale to British Airways, increases net exports.
The “net” in “net exports” refers to the fact that imports are subtracted from
exports. This subtraction is made because imports of goods and services are
c o n s u m p t i o n
spending by households on goods
and services, with the exception of
purchases of new housing
i n v e s t m e n t
spending on capital equipment,
inventories, and structures,
including household purchases of
new housing
g o v e r n m e n t p u r c h a s e s
spending on goods and services by
local, state, and federal governments
n e t e x p o r t s
spending on domestically produced
goods by foreigners (exports) minus
spending on foreign goods by
domestic residents (imports)

---

5 0 0
PA R T E I G H T
T H E D ATA O F M A C R O E C O N O M I C S
included in other components of GDP. For example, suppose that a household
buys a $30,000 car from Volvo, the Swedish carmaker. That transaction increases
consumption by $30,000 because car purchases are part of consumer spending. It
also reduces net exports by $30,000 because the car is an import. In other words,
net exports include goods and services produced abroad (with a minus sign)
because these goods and services are included in consumption, investment, and
government purchases (with a plus sign). Thus, when a domestic household, firm,
or government buys a good or service from abroad, the purchase reduces net
exports—but because it also raises consumption, investment, or government pur-
chases, it does not affect GDP.
The meaning of “government purchases” also requires a bit of clarification.
When the government pays the salary of an Army general, that salary is part of
government purchases. But what happens when the government pays a Social
Security benefit to one of the elderly? Such government spending is called a 
trans-
fer payment
because it is not made in exchange for a currently produced good or
service. From a macroeconomic standpoint, transfer payments are like a tax rebate.
Like taxes, transfer payments alter household income, but they do not reflect the
economy’s production. Because GDP is intended to measure income from (and
expenditure on) the production of goods and services, transfer payments are not
counted as part of government purchases.
Table 22-1 shows the composition of U.S. GDP in 1998. In this year, the GDP of
the United States was about $8.5 trillion. If we divide this number by the 1998 U.S.
population of 270 million, we find that GDP per person—the amount of expendi-
ture for the average American—was $31,522. Consumption made up about two-
thirds of GDP, or $21,511 per person. Investment was $5,063 per person.
Government purchases were $5,507 per person. Net exports were –$559 per per-
son. This number is negative because Americans earned less from selling to for-
eigners than they spent on foreign goods.
Q U I C K Q U I Z :
List the four components of expenditure. Which is the largest?
R E A L V E R S U S N O M I N A L G D P
As we have seen, GDP measures the total spending on goods and services in all
markets in the economy. If total spending rises from one year to the next, one of
two things must be true: (1) the economy is producing a larger output of goods
Ta b l e 2 2 - 1
GDP
AND
I
TS
C
OMPONENTS
.
This table shows total GDP for
the U.S. economy in 1998 and the
breakdown of GDP among its
four components. When reading
this table, recall the identity 
Y
⫽
C
⫹
I
⫹
G
⫹
NX.