Business, Politics, & Society

Gross Private Domestic Investment: Definition, Examples, and How to Calculate GPDI

Written by MasterClass

Sep 11, 2019 • 3 min read

Everyone knows to look to GDP—gross domestic product—for clues about the health of the economy. But what of the lesser-known measure called gross private domestic investment?

One of four components of GDP, this highly specific figure can reveal whether an economy is expanding or contracting, and what it could look like at maximum potential.

Save

Share


What Is Gross Private Domestic Investment?

Gross private domestic investment, or GPDI, is a measure of the amount of money that domestic businesses invest within their own country. GPDI constitutes one component of GDP, which politicians and economists use to gauge a country’s overall economic activity.

3 Essential Characteristics of GPDI

GPDI has three main characteristics:

  1. It is a gross investment figure. This means it includes the production of all goods, even where they replaced a depreciated item. To calculate net investment, you subtract depreciation (officially known as capital consumption adjustment) from the GPDI.
  2. It only includes private investment. Public investment is included in a different measure, known as government consumption expenditures and gross investment, which is also a component of GDP.
  3. It only includes domestic expenditures. Foreign investment is not a part of GPDI.

3 Key Factors That Constitute GPDI

GPDI is the sum of two different types of investment, plus changes in businesses’ inventories. The three factors are:

  1. Non-residential investment. This is what most people think of as a business investment. It constitutes expenditures by businesses on things such as machines, computers, tools, land, buildings, and other equipment and structures.
  2. Residential investment. This is expenditure by landlords on real estate that is rented to tenants. Both new residential structures and home improvements count in this category.
  3. Change in private inventories. Inventory or stock refers to goods produced and held by businesses to be sold later. As well as finished products, this category includes unfinished or intermediate goods and raw materials that are used in production.

How Do You Calculate GPDI?

GPDI is determined by the following formula:

GPDI = (non-residential investment) + (residential investment) + (change in inventories)

To obtain the figure for the change in inventories, you subtract the inventories at the beginning of the year from the inventories at the end of the year. If inventories have decreased, this will be a negative number.

Why Is Determining GPDI Important?

GPDI is important because it provides an indicator of the future productive capacity of the economy. Capital investment today suggests the potential to generate new goods and services based on those resources tomorrow.

  • Alongside net exports, personal consumption expenditures, and government spending, GPDI is one of four factors that go into determining GDP, the most cited measure of economic growth.
  • It is the least stable of these factors, averaging between 12-18% of gross national product, and so can have a decisive impact on the overall economic picture.
  • A percentage at the low end suggests the business cycle is in contraction, while a percentage at the high end correlates to times of expansion.

Example of GPDI in the United States

The US Bureau of Economic Analysis provides official estimates of GPDI and GDP in its
national income and product accounts, a major part of the country’s accounting. GPDI typically
accounts for 15-18% of U.S. GDP.

In Q1 of 2019, GPDI was $3783.364 billion—a record high.

Want a Better Understanding of Economics?

Whether you’re just starting out in business or have your ambitions set on a higher rung in the corporate ladder, understanding economics, and business strategy is paramount to success. Learning to think like an economist takes time and practice. For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In Paul Krugman’s MasterClass on economics, he talks about the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization.

Want to become a better business leader? The MasterClass All-Access Pass provides exclusive video lessons from master economists and strategists, like Paul Krugman.

Save

Share

Want to continue learning?
Find out if MasterClass is right for you
4 quick questions that will take you less than 1 minute.
Take quiz