The expenditures by the four macroeconomic sectors purchase ALL current production. If these four sectors do not buy a good, then the good is not sold (or produced for that matter). Best of all, when the four expenditures are aggregated, the result is GDP.

The four expenditures aggregated from the demand side to measure GDP are exemplified by the purchase of a Hot Momma Fudge Bananarama Ice Cream Sundae by Duncan Thurly (consumption expenditures), a new lug nut tightening wrench bought by OmniMotors to assist in the manufacture of XL GT 9000 Sports Coupes (investment expenditures), a new OmniMotors XL GT 9000 Sports Coupes acquired by the Shady Valley police department for use as a police car (government purchases), and military weapons sold to a crazed foreign leader (exports).

Two Sides of the Market

The overall value of production, which is what GDP seeks to measure, is determined mutually by buyers and sellers through such market exchanges. On one side of market exchanges is the suppliers, producing and selling goods. On the other side is demanders, purchasing and using goods. For each good sold, someone buys. For each good bought, someone sells. The number crunchers at the Bureau of Economic Analysis use this two-sided notion to derive a relatively accurate estimate of total production (that is, gross domestic product) using total expenditures.

To illustrate, consider the purchase of a Hot Momma Fudge Bananarama Ice Cream Sundae by Duncan Thurly for $2. His demand-side of the transaction involves giving up $2 and getting (and presumably enjoying) a Hot Momma Fudge Bananarama Ice Cream Sundae. However, from the supply-side of this transaction, the Hot Momma Fudge Bananarama Ice Cream Shoppe receives the $2 in payment for producing the Hot Momma Fudge Bananarama Ice Cream Sundae. If the store does not produce, then Duncan does not buy. And if Duncan does not buy, the store does not produce.

As such, a reasonable estimate of Hot Momma Fudge Bananarama Ice Cream Sundae production can be derived by aggregating Hot Momma Fudge Bananarama Ice Cream Sundaes expenditures made by all buyers. Of course, a reasonable estimate of Hot Momma Fudge Bananarama Ice Cream Sundae production can also be derived by adding up the revenue received by the Hot Momma Fudge Bananarama Ice Cream Shoppe (which is the income approach to measuring GDP). Best of all, both methods result in essentially the same estimate of production.

Four Expenditures

• Personal Consumption Expenditures: The official measure of consumption expenditures on gross domestic product by the household sector. Personal consumption expenditures average about 65 to 70 percent of gross domestic product. These expenditures come in one of three varieties: (1) durable goods, (2) nondurable goods, and (3) services.


• Gross Private Domestic Investment: The official measure of investment expenditures on gross domestic product by the business sector. Gross private domestic investment averages about 15 percent of gross domestic product. These expenditures come in two broad categories: (1) fixed investment and (2) changes in private inventories.


• Government Consumption Expenditures and Gross Investment: The official measure of government purchases for gross domestic product by the government sector. Government consumption expenditures and gross investment also average about 15 percent of gross domestic product. These purchases are divided into two groups: (1) federal and (2) state and local.


• Net Exports of Goods and Services: The official measure of net exports of gross domestic product by the foreign sector, the difference between exports and imports. Net exports of goods and services also average about 2 percent of gross domestic product, with exports and imports individually in the range of about 10 percent.

A Summary Equation

GDP

=

C + I + G + (X - M)