Expenditures Approach to Calculating GDP

 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

Private Consumption Expenditures (C):

This consists of all goods and service purchased by households. This is broken down even farther into services, nondurable goods, and durable goods.    

• As interest rates increase, people begin to save more and consume less in relation to their spending/saving habits with lower interest rates, so C decreases.
• When taxes go down, people tend to have more income, so C increases.
• When income increases, C increases.

This is the largest category and accounts for about two-thirds of the GDP

Investment (I):

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. 

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.

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 who do not need to work for it.

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

If (X - M) is positive, then X > M resulting in a trade surplus
If (X - M) is negative, then X < M resulting in a trade deficit
If (X - M) is zero, then X=M results in a trade balance

View an Example

GDP and NDP

Net Domestic Product (NDP) is GDP minus depreciation. Since depreciation is sometimes hard to account for, GDP is often used when calculating national income.

NDP = GDP - total capital depreciation