Economy Essay Example | Topics and Well Written Essays - 500 words - 1

Economy - Essay Example tanding of how the economy is utilizing scarce resources, economists delve into classifications of GDP and its effects on the several forms of spending occurring in the country. The GDP is divided into four main components. These include consumption, investment, government purchases and net exports. All these components when added together equal the GDP. The relationship between GDP and its four components can be expressed in the form of an equation as follows: This equation represents an identity (Mankiw 208). This means that the variables of the equation are going to decide on the validity of the equation. In the equation, all sorts of expenditure that is done in the country are classified into either of the components of the GDP. The largest part of the GDP is consumption purchases and constituted 70% of the GDP in the US in 2007 (Mankiw 211). They entail the expenditure of the household on consumer goods and services in a particular period. Consumption purchases entail a flow concept (Gwartney et al. 153). The services and goods that the consumers opt for are mostly nondurable in nature. Expenditures done on food, clothing, entertainment and medical services are part of consumption purchases. These products are not very long-lasting and are used up in a short span of time. On the other hand, durable products such as cars form only one-ninth of the total consumption purchases and are used up over a long period of time. Investment entails the production of capital goods that are going to cause a flow of future services. They are not consumed over a short period of time and include the investments of companies into machineries and equipments as well as houses. Gross private investment can be carried out for the purpose of replacing old machinery or for adding net additions to the existing pool of capital assets (Gwartney et al. 153). Net investment is crucial in knowing the future scope of productivity of the economy. In 2007, they equaled to 15% of the GDP in