What is the Expenditure Approach?

//What is the Expenditure Approach?
What is the Expenditure Approach? 2017-10-04T08:07:09+00:00

Definition: The Expenditure Approach is a method of measuring GDP by calculating all spending throughout the economy including consumer consumption, investing, government spending, and net exports. In other words, this method measures what our country produces by assuming that the finished goods and services of a country equals the amount spent in the country for that time period.

What Does Expenditure Approach Mean?

This is the most common way to measure and calculate nominal GDP. The expenditure method formula is calculated by adding up the following:

(C) consumer spending – this is the amount that all consumers spend on goods and services for personal use.

(I) investment – this is the amount that businesses or owners spend to invest in new equipment or expansions

(G) government spending – this includes spending on new infrastructure like bridges and roads.

(NX) net exports – this includes spending on a country’s exports minus its spending on imports.

The full equation looks like this:

GDP = C + I + G + NX

Let’s take a look at an example of how this is calculated.

Example

Marsha is an economist at the Federal Reserve developing a new monetary policy, so she has to calculate the GDP before she can develop her plans.

She finds that Consumer Spending is $50,000 and that Government Spending is $150,000. These are fairly easy to calculate, and the total is at $200,000.

She researches and finds the following fixed investment expenditure totals for the year: $25,000 the purchase of machinery, $40,000 inventory investment, and $70,000 residential investment. This brings her investment total to $135,000.

Lastly, Marsha calculates net exports by subtracting the $100,000 of imports from the $30,000 of exports. This brings her GDP figures to: $50,000 for consumers, $150,000 for government, $135,000 for investment, and -$70,000 for net exports. Thus, the GDP is $265,000.

Obviously, this is a simplicity example. Calculating GDP in the real world is much complicated, but this is the most common method used by economists.