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In this approach GDP is calculated as the sum of four categories of expenditures on output. These are:
Gross Private Consumption Expenditures(C)
Gross Private Investment (I)
Government Purchases (G)
Net Exports (X - M)
GDP = C + I + G +NX
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Private Consumption Expenditures (C):
This is the largest category in the expenditures approach and accounts for about two-thirds of the GDP. This refers to the total purchases of all household or consumer goods that are new.
- As interest rates increase, people began to save more than they consume so C decreases.
- When taxes go down, people tend to have more income, so C increases.
- When income increases, C increases.
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Investment (I):
There are two types of investment: fixed investment and inventory investment. Fixed investment is the purchase of capital goods such as robots, machines, and factories. Raw materials (intermediate goods) are NOT included in investment. Inventory Investment is the change in inventories such as goods awaiting sale on store shelves, or raw materials which have yet to be assembled into final form or sold.
Positive inventory means that inventory is rising, while negative inventory means that inventory is falling.
Residential Investment is the purchase of new residential homes by the household sector.
Total Investment (I)= Fixed Investment + Inventory Investment + Residential Investment
Eventually all capital begins to wear out because of use or may even become technologically obsolete. This process is called depreciation which is the decrease in the capital's value.
Net private investment is gross private investment minus depreciation. Net private investment is important because it gives economists a clue to a possible increase to a certain capacity that a country can produce.
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Government Purchases (G):
This accounts for the total expenditures on new goods and services by the local, state, and federal government. Transfer payments are not included in government purchases, but rather find their way to consumption or investment. These payments include the spending of the government on welfare projects. These are programs and benefits that are awarded to individuals that do not need to work for it.
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Net Exports (NX = X - M):
The value of a country's total exports minus its total imports
X = foreign country's spending on the country's goods
M = Country's spending on foreign goods
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View an Example
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GDP and NDP
Net Domestic Product (NDP) is GDP minus depreciation. Since depreciation is often hard to account for, GDP is often used when calculating national income.
NDP = GDP - total capital depreciation
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Back to National Income Accounting
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