There are four major components of GDP. Describe each of these components, including a discussion of the way in which each contributes to GDP.

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Question 1

a) There are four major components of GDP. Describe each of these components, including a discussion of the way in which each contributes to GDP.

The four major components of GDP(Y) are household consumption (C), investment (I), government spending (G) and net exports (NX). Their relationship can be express as an identity:

Y=C+I+G+NX

Household consumption (C), calculated in the Australian National Accounts as private final consumption expenditure, is the expenditure on goods and services by households, such as the Rose's dinner at Garden Hotel. It is made up of spending on durable goods (cars, appliances and furniture), non-durable goods (food, clothing, soap and petrol) and services (education, medical). Consumption can be influences by 4 main factors, they are disposable income (income-net taxes), expected future income, wealth, and interest rates.

Consumption is a function of GDP because disposable income relies on GDP and net taxes are a proportion of GDP. Figure (a) shows positive the relationship between real consumption expenditure and real GDP. The bold line is an estimate of the consumption function for real GDP.

Generally, the biggest portion of GDP is consumption, which