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Who Gets GDP?

The national income and product accounts have four groups that use production. The table below shows that in the United States the largest amount goes to ordinary people and is classified as consumption. The food, the clothes, the medical check up, and the gasoline you buy are all consumption expenditures. The next largest use of output is by the government, including state and local governments in addition to the federal government. This category of government spending includes items such as purchases of military goods, payments to public school teachers, and the salary of your congressman. It may surprise you that in 1990 the expenditures of state and local governments were larger than those of the federal government: $673.0 million for the former and $508.4 for the latter. Not included as government expenditures are payments for which no service is expected, such as payment of social security to the elderly. This sort of transaction is classified as a transfer.

U.S. Gross Domestic Product, Selected Years

(Numbers in billions of dollars)




Government Spending
Net Exports


Sources: Survey of Current Business, August 2001; <>, Tables 1.1, 1.9 and 1.14.

The third category, investment, includes construction of new factories and the purchase of new machines by businesses. It also includes changes in inventories held by business and the purchase of new homes by consumers. New homes are considered investment spending because they are a long-lived assets that will yield services for many years. On the other hand, purchases of appliances and vehicles by consumers are considered consumption, though these items also have lifetimes much longer than a year. The dividing line between investment and consumption is not clear-cut and sometimes shifts. At one time the purchase of a mobile home was classified as consumption, but it is now classified as investment.

The use of the word "investment" in discussing GDP differs from the use of this word in every day speech. People talk about investing in stocks and bonds, for example, yet purchases of stocks and bonds are not considered investment for purposes of computing GDP. In fact, these transactions are not counted at all because they involve the exchange of existing or new financial instruments, not the purchases of actual output. If you loan a company money by buying a newly-issued bond, investment will be affected only if the company uses your money to purchase new capital or to increase inventory. Differences in the way economists use words and the way they are used in everyday conversation are common.

The last group that receives the output that our economy produces is foreigners. To take this group into account, we must add exports to consumption, investment, and government spending. However, some consumption, investment, and government spending is for goods that are produced in other countries, not here. One way to account for these purchases of foreign products would be to adjust consumption, etc. so that they included only the amounts spent on domestic products. However, this is not the way imports are taken into account. They are subtracted from exports to obtain net exports. A reason for this procedure is that data for imports as a whole is more reliable than data broken into imported consumption expenditures, imported investment expenditures, and imported government expenditures.

The small numbers for net exports in the table disguises the importance of foreign transactions. In 1990 exports were $557.2 billion, or about ten per cent of total production, and imports were $628.6 billion. Because they were similar in size, their difference, net exports, was fairly small.

We can summarize our discussion so far in terms of an equation that you will see again:

(1) GDP = C + I + G + Xn

We can also break apart GDP by the income flows to which the production gives rise.

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Copyright Robert Schenk