Where does a government purchase of a military tank go in GDP?

Under the expenditure approach, GDP is the sum of four kinds of spending on newly produced final goods and services: consumption (C) by households, investment (I) by firms and home buyers, government purchases (G), and net exports (NX, exports minus imports). The buyer of a tank is the government, the tank is a finished product rather than an input to something else, and it was produced this year, so the whole purchase counts in G. Government purchases include everything the government buys to provide services, from fighter jets and tanks to road paving and the salaries of soldiers and teachers.

Put numbers on it. A hypothetical economy has C = 700, I = 150, G = 200, exports of 80, and imports of 100, all in billions of dollars, so GDP = 700 + 150 + 200 + 80 minus 100 = 1,030 billion. The military buys 10 new tanks built by a domestic manufacturer at 10 million dollars each, 100 million in total, or 0.1 billion. G rises to 200.1 and GDP rises to 1,030.1 billion. The GDP calculator runs the same sum with your own figures.

Two twists change the answer. If the tanks were built in another country, G still rises by 0.1 billion, but imports also rise by 0.1 billion, so net exports fall by the same amount and GDP stays at 1,030 billion; the production happened abroad and counts in the other country's GDP. If the tanks were built last year and sat in the factory until this year's sale, they were counted last year as inventory investment. This year G rises and inventory investment falls by the same amount, so this year's GDP does not change. GDP counts production once, in the year it happens.

The same three questions classify almost any purchase: who is the final buyer, was the item produced this year, and was it produced at home? A family buying a newly built house is I, because new residential construction is investment, not consumption. A firm buying a new delivery truck or factory machine is I. A firm adding unsold goods to its warehouse is I as inventory investment. A household buying groceries or a haircut is C. A foreign buyer purchasing wheat grown in the country is an export and raises NX. A household buying a phone made abroad raises C and imports by the same amount, so GDP is unchanged.

Some spending is left out entirely. A Social Security check or unemployment benefit is a transfer payment: no good or service is produced in return, so it is not part of G or GDP, though it counts in C later if the retiree spends it on new goods. A used car bought from a neighbor was counted in the year it was built, so it adds nothing; when a dealer sells a used car, only the dealer's markup for the service of selling it counts. Buying stocks or bonds is a financial transaction, not production. Steel bought by an automaker is an intermediate good whose value is already inside the car's price. For the full definition of GDP and the three ways to measure it, read the student's guide to GDP or work through the GDP module.