No, Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Social Security payments are transfer payments, which are not included. They are, however, counted as personal consumption expenditures (PCE) once they are used to purchase something. Because of this, counting Social Security payments issued from the government to the recipient would be counting the same money twice.
Key Takeaways
- Gross domestic product, or GDP, is a common measure of a nation’s economic output and growth.
- GDP takes into account consumption, investment, and net exports.
- While GDP also considers government spending, it does not include transfers such as Social Security payments.
- This is to prevent money spent from Social Security from being double-counted.
Transfer Payments
When calculating GDP, government spending does not include transfer payments (the reallocation of money from one party to another), such as payments from Social Security, Medicare, unemployment insurance, welfare programs, and subsidies. Because these are not payments for goods or services, they do not represent a form of final demand, also known as GDP.
However, once the recipient uses funds from one of these programs to buy something—that is, makes a transfer payment to purchase a good or service—it is captured in the PCE component of GDP. To include Social Security or other transfer payments and personal consumption in GDP would skew the calculation because it would be a form of double-counting.
Transfer payments are, however, included in government current expenditures and total government expenditures, which are used for budgeting purposes.
Calculating Gross Domestic Product
The GDP measures the value of the production of goods and services, and it is the most common gauge of the overall size of an economy. GDP is an economic accounting identity composed of four main components: personal consumption expenditures (C), investment (I), government spending (G), and net exports (exports minus imports, or X-M).
The GDP formula is:
GDP
=
C
+
I
+
G
+
(
X
−
M
)
where:
C
=
Personal consumption expenditures
I
=
Investment
G
=
Government spending
X
=
Exports
M
=
Imports
begin{aligned} &text{GDP} = C + I + G + (X – M) \ &textbf{where:} \ &C = text{Personal consumption expenditures} \ &I = text{Investment} \ &G = text{Government spending} \ &X = text{Exports} \ &M = text{Imports} \ end{aligned} GDP=C+I+G+(X−M)where:C=Personal consumption expendituresI=InvestmentG=Government spendingX=ExportsM=Imports
Explaining the Terms
Personal Consumption Expenditures
Personal consumption expenditures are a comprehensive measure of consumer spending. This component makes up about 68% of the U.S. economy and is the main driver of economic growth.
Investment
Gross private domestic investment, if done by businesses, is sometimes referred to as capital expenditures. This component represents residential housing construction and businesses’ purchase of equipment, structures, and changes in inventories.
In 2013, the U.S. Bureau of Economic Analysis expanded coverage of intellectual property rights within the investment component of GDP to better capture businesses’ expenditures on research and development and for entertainment, literary, and artistic originals for which there is a long-lasting economic benefit. Industries heavily reliant on intellectual property accounted for more than 38% of the GDP by 2014.
Government Spending
This component measures all government (federal, state, and local) consumption and investment. For example, U.S. Federal government consumption includes government employee salaries and the payments for goods and services, such as maintenance of the White House and salaries of its staff.
Government investment includes the purchase of structures, equipment, and software. Government spending makes up about 19% of the U.S. economy; it does not include transfer payments, such as Social Security.
Net Exports
This component represents the net value of a country’s total exports minus the value of its total imports within a specific period, such as one year. This component is usually a net negative for the U.S. GDP of about 3%, meaning that the United States usually imports more goods and services than it exports. When an economy exports more than it imports, net exports are positive, indicating a positive trade balance.
