Consumption and Investment

Back in the ancient days of yore (before the 1980s), government purchases were merely government purchases, with the implication that such spending was largely dumped into a black hole. The modern National Income and Product Accounts take into consideration that government buys a variety of different types of goods, especially some consumption and some capital.

Government Times Three

• Government Expenditures: This is the term for ALL spending by the government sector. It includes spending for the purchase of goods and services which falls under the title of government purchases. It also includes expenditures that are NOT for goods and services, which are termed transfer payments.


• Government Purchases: This is the specific term referring to actual expenditures on final goods and services, or gross domestic product, by the government sector. It specifically excludes transfer payments.


• Government Consumption Expenditures and Gross Investment: This is the official measure of the government purchases component of aggregate expenditures used in the calculation of gross domestic product. This term reflects the fact that the government sector purchases both consumption goods and capital goods.

Two Categories

• Federal Purchases: About one-third of total government purchases are those made by the U.S. federal government (Congress, the President, and the vast array of federal agencies). Federal purchases are divided into two subcategories: national defense and nondefense. National defense is about two-thirds of federal purchases and nondefense the remaining one-third. National defense and nondefense are further divided into consumption expenditures and gross investment. In both cases, consumption expenditures are 85-90 percent and gross investment is 10-15 percent.


• State and Local Purchases: About two-thirds of total government purchases are those made by the fifty state governments, hundreds of city governments, thousands of county governments, and a whole bunch of other local government authorities (such as school districts). Like federal expenditures, state and local expenditures are divided into consumption expenditures and gross investment. Consumption expenditures are roughly 80 percent and gross investment is about 20 percent.

It is worth highlighting that state and local purchases are about twice the size of federal purchases. While activity by the federal government tends to get the most notoriety, state and local governments tend to do most of the work. Another point of interest is that state and local governments tend to devote a bit more to gross investment relative to consumption expenditures, than does the federal government. A last highlight is the relative magnitude of national defense, coming in at 20 percent of total government purchases. This item is one that obviously jumps significantly during wars.

Three More 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.


• Net Exports of Goods and Services: The official measure of net exports of gross domestic product by the foreign sector, which is 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.