We can divide the goods and services produced during any period into four broad components, based on who buys them. These components of GDP are personal consumption (C), gross private domestic investment (I), government purchases (G), and net exports (Xn). Thus
EQUATION 21.1
We will examine each of these components, and we will
see how each fits into the pattern of macroeconomic activity. Before we begin, it will be helpful to distinguish between two es of variables: stocks and flows. A flow variable is a variable
that is measured over a specific period of time. A stock variable is a variable that is independent of time. Income is an example of a flow variable. To say one’s income is, for example, $1,000
is meaningless without a time dimension. Is it $1,000 per hour? Per day? Per week? Per month? Until we know the time riod, we have no idea what the income figure means.The balance in a checking
account is an example of a stock variable. When we learn that the balance in a checking account is1 ,000,know precisely what that means; we do not need a time dimension.We will see that stock
and flow variables play very different roles in macroeconomic analysis.
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