Describe what is included in each of the components of GDP. (You may exclude government spending.) Explain how each component of GDP is influenced (and why) by other variables in the economy.

GDP = Consumption + Investment + Government + (Exports - Imports). Consumption spending by individuals, by far the largest portion of GDP (± 70%), includes goods and services used up in a relatively short period of time. These are goods and services which people buy on a regular basis, such as food, entertainment, rent, clothes, and gas. Investment spending accounts for the second largest portion of GDP (± 15%). These are goods and services that will provide …

…will increase if U.S.: incomes, preferences for foreign goods, or prices of substitute goods increase. In other words, changes in net exports follow the law of supply and demand. If prices of substitute goods abroad rise, U.S. goods will become more attractive to everyone. Exports will rise and imports will fall. If prices of substitute goods rise in the U.S., then exports will fall and imports will increase for the same reasons.