Describe the expenditure based approach of GDP measurement


A different perspective on components of GDP is obtained by looking at the expenditure side of the national income accounts. The expenditure approach measures GDP as total spending on final goods and services produced within a country or nation during a specified period of time. Four major categories of spending are added to get GDP i.e. consumption, investment, government purchases of goods and services and net exports of goods and services. In symbols we can describe as

Y = GDP = Total output or product
= Total income
= Total expenditure
C = Consumption
I = Investment
G = Government purchases of goods and services
NX = Net exports of goods and services
With these symbols, we express the expenditure approach to measuring GDP as

Y = C + I + G + NX    ------------------ (1)

This equation is called income-expenditure identity because it states that income Y, equals total expenditure 
C + I + G + NX. Let us discuss the components which constitute the GDP measurement.

A—Consumption
Consumption is spending by domestic households on final goods and services including those produced abroad. It is largest component of expenditure usually accounting for about two thirds of GDP. Consumption expenditure are grouped into three categories.

1. Consumer durables: Consumer goods are long-lived consumer items such as cars, TV’s, furniture and major applications.

2. Nondurable goods: Non durable goods are short-lived items such as food, clothing and fuel.

3. Services: Services such as education, health care, financial services and transportation.

B—Investment

Investment includes both spending for new capital goods called fixed instrument and increases in firms inventory holdings called inventory investment. Fixed investment in turn has two major components.

1. Business of fixed investment: It is spending by business on structures such as factories, warehouses and office buildings and equipments such as machines, vehicles and furniture.

2. Residential investment: It is spending on the construction of new houses and apartment buildings.

C—Government Purchase of Goods and Services

Government purchases of goods and services include any expenditure by the government for a currently produced good or service, foreign or domestic are the third major component of spending.

D—Net Exports

Net exports are exports minus imports. As we know export are goods and services produced within a country that are the goods and services produced abroad that are purchased by country’s residents. Net exports are positive if exports are greater than imports and negative if imports exceed exports.
Exports are added to total spending, because they represent spending by foreigners on final goods and services produced in a country. Imports are subtracted from total spending because consumption, investment and government purchases are defined to include imported goods and services. Subtracting imports ensures that total spending C + I + G + NX reflects spending only on output produced in the country. For example an increase in imports of America means that Americans are buying Japanese cars instead of American cars.

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