In some abbreviations: GPDI = gross private

In this lesson, you will define the concept of gross private domestic investment (GPDI), list the factors that are used to determine it, and learn to calculate it using a simple formula.

GPDI Defined

There are many different methods used by politicians and economists to measure the relative health of a given country’s economy. Some measurements measure the overall health of an economy while others measure more specific factors within that economy. Gross private domestic investment (GPDI) falls under the latter because it is used to measure a specific factor within a country’s economy. GPDI is defined as the amount of money that domestic businesses invest within their own country.

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Specific Factors of GPDI

In order to calculate gross private domestic investment, it is important to first know the three factors that make up the calculation.

GPDI includes the following types of investment:

  1. Business expenditures for things like machines, tools, land, and buildings
  2. Expenditures by landlords for things like home improvements or new buildings
  3. Changes in inventories that are held by businesses. In order to determine this number, you need to subtract the business inventories at the beginning of the year from the business inventories at the end of the year. This number can be negative if there is a decrease in business inventories instead of an increase.

Gross private domestic investment is the sum of these three factors. The sum will always be expressed in a country’s local currency; however, when comparing different countries, the United States Dollar is used as a common currency.

Calculating the GPDI

In order to simplify the formula used to determine gross private domestic investment, we will use some abbreviations:

  • GPDI = gross private domestic investment
  • C = business expenditures for things like machines, tools, land, and buildings
  • R = expenditures by landlords for things like home improvements or new buildings
  • I = changes in inventories that are held by businesses

The formula to calculate gross private domestic investment is as follows:GPDI = C + R + I

What GPDI Really Looks Like

For this example, let’s start with a fictitious country called Econostan. Here is some of the information about Econostan’s economy from last year:

  • Businesses invested $500,000 in new tools, machines, land, and buildings
  • Landlords invested $100,000 to fix up the houses they rented out to people
  • Business inventories were valued at $250,000 at the beginning of the year and $325,000 at the end of the year

Now we can take this information and plug it into the formula.GPDI = C + R + IGPDI = $500,000 + $100,000 + ($325,000 – $250,000)GPDI = $500,000 + $100,000 + $75,000GPDI = $675,000Now let’s calculate the gross private domestic investment in Econostan when there is a decrease in business inventories instead of an increase:

  • Businesses invested $500,000 in new tools, machines, land, and buildings
  • Landlords invested $100,000 to fix up the houses they rented out to people
  • Business inventories were valued at $325,000 at the beginning of the year and $225,000 at the end of the year

GPDI = $500,000 + $100,000 + ($225,000 – $325,000)GPDI = $500,000 + $100,000 – $100,000GPDI = $500,000The only difference here is that you need to subtract the business inventories instead of adding them as we did previously.

Lesson Summary

Gross private domestic investment is the specific measurement of the amount of money that domestic businesses invest in their home country. It is used to measure specific factors in an economy rather than the economy’s overall health.

By determining the amount of business expenditures, landlord expenditures, and business inventory changes, the formula GPDI = C + R + I will easily help you determine any country’s gross private domestic investment in a given year.

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