What is the GDP Expenditure Approach?

//What is the GDP Expenditure Approach?
What is the GDP Expenditure Approach? 2017-10-04T21:56:47+00:00

Definition: The GPD expenditure approach is a technique for calculating the gross domestic product by adding the consumption, investments, government spending, and net exports of a country.

What Does GDP Expenditure Approach Mean?

What is the definition of GDP expenditure approach? Gross Domestic Product is total value of all goods and services produced within the borders of a country. The expenditure method is one system used to calculate this number by looking at the total amount spent domestically by citizens, businesses, and the government. This technique does not take into consideration who owns the means of production. It simply looks at the expenditures. Essentially, it states that all spending in the private sector adds up a country’s nominal GDP.

This means it does not account for inflation. Thus, adjustments need to be made to this figure to arrive at the country’s real GDP.

This is one of the most popular and widespread methods for calculating GDP because it is fairly simple.

Let’s look at an example.

Example

Consumer spending accounts for the majority of GDP, which includes goods with long-term and short-term uses as well as services. It doesn’t include productions from unpaid work like volunteering, illegal activities that circulate and generate money, or trades that don’t involve currency. These activities aren’t counted because they are hard to track and quantify if the proceeds and activities are reported or conducted within legal standards. Some countries have expanded their GDP to include some of these activities if it is performed with the consent of all parties involved.

Let’s assume the following about an economy:

  1. Consumer spending: $200M
  2. Government spending: $177M
  3. Investments: $106M
  4. Net exports $20M

Thus, our country has a total GDP of $498M ( 200 + 177 + 106 +20 ).

This figure represents the total value of all goods and services produced by the nation excluding exchanges of value that aren’t tracked. Keep in mind that GDP is susceptible to changes associated with the business cycle and law.

Summary Definition

Define Expenditure Method: GDP expenditure approach means a method for calculating a country’s gross domestic product.