Introduction to Finance

Government expenditures (GE)
include expenditures for goods and services plus gross 
investments by both the federal and the state and local governments. The federal government 
spends over one-half of its total expenditures on direct payments to individuals in the form 
of health, Social Security, and income security support. This should not be a surprise, since 
some would argue that the elected representatives of the people run the U.S. government for 
the benefi t of the people. 
Gross private domestic investment (GPDI)
measures fi xed investment in residential 
and nonresidential structures, producers’ durable equipment, and changes in business inven-
tories. The fi nal component of GDP is the 
net exports (NE)
of goods and services, or exports 
minus imports.
In equation form, we have,
GDP = PCE + GE + GPDI + NE 
(7.1)
Consumption is refl ected by the sum of personal consumption expenditures and govern-
ment purchases of goods and services. Savings used for capital formation produce the gross 
private domestic investment. In addition, if the exports of goods and services exceed imports, 
GDP will be higher.
Table 7.1
contains a breakdown of these four GDP components for the United States in 
2006, 2009, 2012, and 2015. For 2015, the gross domestic product was $18.2 trillion, relative 
to $15.7 trillion for 2011. GDP was $13.2 trillion GDP in 2006 and $14.3 trillion for 2009. 
However, the rate of increase over the decade of the 2000s slowed during the latter part, which 
coincided with the 2007–08 fi nancial crisis and the 2008–09 Great Recession.
Personal consumption expenditures of $12.4 trillion in 2015 accounted for about 69 per-
cent of GDP. This percentage relationship has been very stable throughout the decade of 
the 2000s and shows the importance of the individual in sustaining and improving the stand-
ard of living as refl ected in GDP growth over time. In dollar terms, personal consumption 
expenditures for both durable and nondurable goods declined from the 2006 to 2009 levels, 
as the economy began slowing in 2007 and then entered the 2008–09 Great Recession before 
recovering by 2012, with further recovery by 2015. However, the dollar amount of nondurable 
goods for 2015 was still below the 2006 level. Individual expenditures for services increased 
in 2009 and continued to increase in 2012 and 2015 to the extent that total personal consumption 
expenditures increased during the years shown in Table 7.1.
Capital formation measured in terms of gross private domestic investment dropped 
sharply from $2.2 trillion in 2006 to $1.6 trillion in 2009, before recovering to $2.1 trillion