The formula for calculating GDP: GDP = Consumption + Investment + Government + Net Exports (i.e. imports minus exports).
Personal Consumption Expenditures
Personal Consumption Expenditures include:
Durable goods - automobiles, furniture, large appliances, etc.
Non-durable goods - clothing, food, fuel, etc.
Services - banking, health care, education, etc.
Business Investment
Business investment is private domestic investment or capital expenditure. Businesses spend money to invest in their business activities. For example, a business might buy machinery. Business investment is an important part of GDP because it increases the productive capacity of an economy and raises employment levels.
Business investment is divided into two subcomponents: fixed investment and changes in inventories.
Fixed investment
Most fixed investment is non-residential. This consists primarily of business equipment, such as software, capital goods, and manufacturing equipment.
Change in Inventory
Change in Inventory measures how much a company has added to its inventory of goods they plan to sell. An increase in a company's inventory contributes to GDP.
Government Expenditures
Government expenditures are government consumption expenditures and total investment. The government spends on equipment, infrastructure, and personnel payroll. Government spending may become more important relative to other components of a country's GDP when both consumer spending and business investment fall sharply.
Net Exports
Goods and services produced by an economy for export to other countries, minus imports purchased by domestic consumers, represent a country's net exports.
GDP and Investment
Investors pay attention to GDP because it provides a framework for decision-making; the GDP report's "Corporate Profits" and "Inventories" data are an important resource for stock investors because both categories show overall growth for the period. Corporate Profit data also shows pre-tax profits, operating cash flow and breakdowns for all major sectors of the economy.
Comparing GDP growth rates in different countries can play a role in asset allocation and help decide whether to invest in fast-growing economies abroad.
One interesting metric that investors can use to understand stock market valuations is the ratio of total market capitalization to GDP, expressed as a percentage. The closest approximation to this in terms of stock valuation is the ratio of a company's market capitalization to its total sales (or revenues) on a per-share basis, known as the price-to-sales ratio.