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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:
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
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