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Gross Domestic Product (GDP) is generally thought of as a measure of an economy's aggregate output or income, but, as it turns out, GDP also represents aggregate expenditure on an economy's goods and services. Economists divide the spending on an economy's goods and services into four components: Consumption, Investment, Government Purchases, and Net Exports.
Consumption (C)
Consumption, represented by the letter C, is the amount that households (i.e. not businesses or the government) spend on new goods and services. The one exception to this rule is housing, since expenditure on new housing is placed in the investment category. This category counts all consumption spending regardless of whether the spending is on domestic or foreign goods and services, and the consumption of foreign goods is corrected for in the net exports category.
Investment (I)
Investment, represented by the letter I, is the amount that households and businesses spend on items that are used to make more goods and services. The most common form of investment is in capital equipment for businesses, but it's important to remember that households' purchases of new housing also counts as investment for GDP purposes. Like consumption, investment expenditure can be used to purchase capital and other items from either domestic or foreign producers, and this is corrected for in the net exports category.
Inventory is another common investment category for businesses, since items that are produced but not sold in a given time period are considered as having been purchased by the company that made them. Therefore, the accumulation of inventory is considered positive investment, and the liquidation of existing inventory is counted as negative investment.
Government Purchases (G)
In addition to households and businesses, the government can also consume goods and services and invest in capital and other items.