ACCUMULATION: The process of acquiring an item and adding that item to others previously acquired. In an economic context this most often refers to the accumulation of capital, as in the phrase "capital accumulation." However, it is also used in the context of consumer durable goods, financial assets, money, wealth, and a host of other "stock" variables. When applied to capital, the process of accumulation occurs through investment.
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GROSS PRIVATE DOMESTIC INVESTMENT:
This is the official item in the National Income and Product Accounts maintained by the Bureau of Economics Analysis measuring capital investment expenditures. Gross private domestic investment is expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period. These expenditures tend to be the least stable of the four expenditures, averaging between 12-18 percent of gross domestic product. This percentage tends to be at the low end during business-cycle contractions and at the high end during business-cycle expansions. The other official expenditures included in the National Income and Product Accounts are personal consumption expenditures, government consumption expenditures and gross investment, and net exports of goods and services. Gross private domestic investment is the official government measure of investment expenditures undertaken by the business sector. It seeks to quantify that portion of gross domestic product that is purchased by the business sector and which is used, in theory at least, for investment and the acquisition of capital goods. These expenditures purchase a wide range of capital goods, from factories to socket wrenches, from delivery trucks to nuclear power plants, from office buildings to copy machines.
A Specific MeasureAs the three modifiers in this term suggest, gross private domestic investment is a relatively specific measure of investment. It is a gross (versus net) measure of private (versus public) domestic (versus foreign) investment.
- Gross: Gross private domestic investment includes the production of ALL capital goods, including those used to replace depreciated capital. Subtracting capital depreciation (officially known as the capital consumption adjustment) from gross private domestic investment results in net private domestic investment.
- Private: Moreover, gross private domestic investment measures investment expenditures made by the private sector. Any capital goods purchased by the public, or government, sector is included in government consumption expenditures and gross investment.
- Domestic: And lastly, gross private domestic investment is expenditures on capital goods used in the domestic economy. The alternative is investment expenditures on capital goods used by the foreign sector.
Investment Times ThreeGross private domestic investment is one of three related terms containing the word investment. Investment and investment expenditures are the other two terms. They range from the conceptual (investment) to the official measurement (gross private domestic investment). Here is an overview of all three:
- Investment: This is the generic term for the sacrifice of current consumption to enhance future production capabilities. Such investment can involve the business acquisition of capital goods or activities undertaken by the household sector, such as attending college. Investment is the fundamental means of achieving economic growth.
- Investment Expenditures: This is the specific term referring to actual expenditures on goods and services, or gross domestic product, by the business sector. Investment expenditures specifically deal with investment activities that involve business purchases of capital goods. Not all generic investment activities involve investment expenditures on gross domestic product.
- Gross Private Domestic Investment: This is the official measure of the investment expenditures component of aggregate expenditures used in the calculation of gross domestic product. While the official number-crunchers try to measure ALL investment expenditures, some are missed by the official calculation.
Two Investment CategoriesGross private domestic investment is officially separated into two categories in the National Income and Product Accounts: fixed investment and changes in private inventories.
- Fixed investment is the category that includes the capital goods that best reflects what most people consider capital investment, and it is generally about 95 to 97 percent of gross private domestic investment. This category includes factories, machinery, tools, and buildings. More specifically, fixed investment is divided into two major subcategories: nonresidential and residential.
- The nonresidential category, once again, typifies what most people think of as business investment. Coming in at just under 70 percent of gross private domestic investment and just over 70 percent of fixed investment, this subcategory includes structures (buildings, pipelines, oil wells) and producers' durable equipment (computers, machinery, vehicles). Structures are about one-fourth of nonresidential fixed investment and producers' durable equipment is about three-fourths.
- The residential category primarily includes houses and apartments, and comes in at just under 30 percent of both fixed investment and gross private domestic investment. Like nonresidential fixed investment, residential fixed investment is divided into structures and producers' durable equipment. Structures are separated into single family (houses) and multifamily (apartments). Of some importance, single family structures can be owned by either a business or an individual. In other words, the production of an owner-occupied house is included as gross private domestic investment in the National Income and Product Accounts. This is the only notable purchase made by the household sector that is not included as a personal consumption expenditure. Structures are about 98 percent of this residential category and producers' durable equipment is the remaining 2 percent.
- Change in private inventories is investment by the business sector in the stocks of finished products, intermediate goods, raw materials, and other inputs that businesses keep on hand to use in production. Inventories also include final goods that have been produced but remain unsold. These are considered investment because just like businesses need factories and equipment to produce goods, they need inventories to smooth the flow of production and sales. In fact, inventories are frequently termed "working capital."
Changes in private inventories tend to be about 3 to 5 percent of gross private domestic investment. But while small, they are a highly volatile component. The reason is the inventories act as a buffer between aggregate expenditures and aggregate production. If aggregate expenditures exceed aggregate production, then private business inventories fall. If aggregate production exceeds aggregate expenditures, then private inventories rise. This volatility is an indicator of business-cycle instability.
Two categories of private inventory changes are included in the National Income and Product Accounts: farm and nonfarm. Again, while variation is the norm, the nonfarm component tends to be the bigger of the two. Nonfarm is further separated into the subcategories of manufacturing, wholesale trade, and retail trade, with manufacturing usually the largest of the three.
Three More ExpendituresThe number crunchers at the Bureau of Economic Analysis separate gross domestic product into expenditures by the four macroeconomic sectors (household, business, government, and foreign). Gross private domestic investment is those by the business sector. The official entries in the National Income and Product Accounts for the other three are: personal consumption expenditures (household), government consumption expenditures and gross investment (government), and net exports of goods and services (foreign).
- 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.
- 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, 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.
GROSS PRIVATE DOMESTIC INVESTMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 27, 2024].
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