There are four components to aggregate expenditures. These components are used to calculate gross domestic product.
The four components are consumer spending, investment on the part of businesses, government purchases, and net exports.
- Consumer spending makes up the largest part of aggregate expenditures in countries such as the United States. This includes all final goods and services that consumers buy.
- Business investment refers to spending on capital goods. When businesses buy things like new equipment, that counts as investment.
- Government purchases are not the same thing as total government spending. The government spends on things like paying interest on the national debt and on transfer payments such as welfare and unemployment insurance. These payments do not count as government purchases. This component of aggregate expenditures only counts government spending on new goods and services. So, when the government pays a teacher that money is counted, but a Social Security check to a retired teacher does not count.
- Net exports are found by subtracting the dollar value of imports from the dollar value of exports.
Together, these four components make up aggregate expenditures and are used to calculate GDP.