A:

No, Social Security payments are not included in the U.S. definition of the gross domestic product (GDP).

Transfer Payments

For the purposes of calculating GDP, government spending does not include transfer payments – the reallocation of money from one party to another – which includes Social Security, Medicare, unemployment insurance, welfare programs and subsidies. Because these are not payments for goods or services they do not represent a form of final demand, or GDP.

However, once the recipient uses funds from one of these programs to buy something – that is, makes a transfer payment to purchase a good or service in econo-speak – it is captured in the personal consumption expenditure component of GDP. To include Social Security or other transfer payments and personal consumption in GDP would be a form of double-counting.

Transfer payments are included in government current expenditures and total government expenditures, which are used for budgeting purposes.

Calculating Gross Domestic Product

The GDP measures the value of the production of goods and services, and it is the most common gauge of the overall size of an economy. GDP is an economic accounting identity comprised of four main components: personal consumption expenditures (“C”), investment (“I”), government spending (“G”) and net exports (exports minus imports, or “X-M”).

So, the formula for calculating GDP is C + I + G + X - M.

Explaining the Terms

Personal Consumption Expenditures

Personal consumption expenditures are a comprehensive measure of consumer spending on goods and services. This component makes up about 68% of the U.S. economy and is the main driver of economic growth.

Investment

Gross private domestic investment, if done by businesses, is sometimes referred to as capital expenditures. This component represents residential housing construction and businesses' purchase of equipment, structures and changes in inventories.

In 2013, the U.S. Bureau of Economic Analysis expanded coverage of intellectual property rights within the investment component of GDP to better capture businesses’ expenditures on research and development, and for entertainment, literary and artistic originals for which there is a long-lasting economic benefit. Investment makes up about 16% of the U.S. GDP.

Government Spending

This component measures all government consumption and investment, including the federal, state and local levels of government. For example, U.S. federal government consumption includes government employee salaries and the payments for goods and services, such as maintenance of the White House. Government investment includes the purchase of structures, equipment and software. Government spending makes up about 19% of the U.S. economy; it does not include transfer payments, such as Social Security.

Net Exports

This component represents the net value of a country's total exports minus the value of its total imports. This component is usually a net negative for GDP of about 3%, meaning that the United States usually imports more goods and services than it exports.

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