Welcome back. In this lesson, we will discuss about what are the main components of our GDP gross domestic product, something that we discussed previously that's also our income. The first one would be household consumption, a big C. The more a household consumes the higher the GDP. Just that? No, we have household consumption and also investment. Investment in gross capital formation. Private companies putting money in the economy, that's what we call investment or investment lead by private companies. The more they invest, we know the higher the production. We have household consumption and investment in gross capital formation. Third, government expenditure. When I say government expenditure, please do not mess up with interests on a debt. There is nothing to do. Government expenditure is just all expenditure that the government is doing for example in infrastructure, in industrial capacity, all of this stuff. Consume increase, GDP increase, investment increase in gross capital formation, GDP increase, government expenditure increase, my GDP increase as well. Just that? No, I have exports, if I produce more of a product to be exported, the higher the GDP. Now you might say I have a question, but professor is sports go abroad, I'm going to sell other country? Yes, you're right but let's not forget that the export was manufactured here in your country, and it does not matter to whom you sell it. You manufacture your export here but let's say I sell to America so to other country, yes, but remember the concept, gross domestic product, you manufacture here and sell to somewhere else. Just that? No, the last one, imports. Check-in the equation that I'm going to show you two minutes that imports are deducted from our GDP. How come? Nothing wrong so far with imports, but as the concept of a GDP, it should reflect it only goods and service made here within the boundaries of a country, I may consume some imported goods that's why I have to deduct import from my GDP. This is not bad for example, my private investment, investment in gross capital formation. I might have to imports capital goods to conduct my gross capital formation that's why we have to deduct import from my GDP. Another example, let's not forget we are just measuring gross domestic product, let's not use the wrong concept that given the fact I deduct imports from my GDP, this is a bad thing. Not really, we will discuss later on. Just to get to advance it in some points, we know that we discuss about exports very briefly and also we discuss about imports. How can I compare between them? We know that exports minus imports is my trade balance. If my exports is greater than my imports, I pause it a trade surplus all the way around. If my imports are greater than my exports though, I have a trade deficit. That's pretty much easy not big a deal. If you want to put all these equation in my GDP from the demand side, we would have the following; I, that's considered to be my GDP, that's a macroeconomic identity. Y equal to C that stands for my household consumption, I, that stands for my investment or gross capital formation, G, that stands for my government expenditure plus X, that stands for my exports minus imports. Why minus imports? Because I may consume some import goods and again, basing on the concept of gross domestic product, I have to deduct everything that has been consumed used it imported goods, that's one of the reason.
