Expenditure Approach (GDP)

With the Expenditure Approach, we're going to focus on the total spending on final goods / services.

PRO TIP: "Final" means final... not intermediary!

GDP = Consumption + Gross Investment + Government Purchases + Net Exports

Think "purchases" by citizens of a country.

  • Durable goods (cars, appliances)
  • Non-durable goods (food, clothing)
  • Services (education, banking, health care)

Think companies "re-investing" into themselves. This covers...

  • Capital investments
  • Inventory changes

This DOES NOT include...

  • Depreciation

...because we're dealing with "Gross" investment. Not "Net" investment.

However, if you're given Net Investment... add back Depreciation to get to Gross Investment!

Think... government purchases.

  • All local, state, and federal government spending

This DOES NOT include...

  • Social Security (& other similar payment programs)

...because these allocate money to citizens instead of pay for goods and services.

Net Exports = Exports - Imports

Remember...

  • Exports > Imports means a country is bringing expenditures into their economy (through exporting to other countries).
  • Exports < Imports means the country is outsourcing expenditures to other countries (through imports).

Given a scenario...

Scenario: Given the following values, calculate GDP with the Expenditure Approach.

Consumption Expenditures$700
Durable Expenditures$200
Nondurable Expenditures$300
Gross Investments in Capital$100
Changes in Inventory$20
Profits$150
Government Purchases$200
Exports$50
Imports$30
Net Foreign Factor Income$10
Depreciation$30

Consumption
Consumption Expenditures = $700

Gross Investment
Gross Investments in Capital = $100
Changes in Inventory = $20

Government Purchases
Government Purchases = $200

Net Exports
Exports = $50
Imports = $30

GDP = Consumption + Gross Investment + Government Purchases + Net Exports
GDP = ($700) + ($100 + $20) + ($200) + ($50 - $30)
GDP = ($700) + ($120) + ($200) + ($20)
GDP = $1,040

Answer: By focusing on the expenditures paid in this economy, we found a GDP of $1,040.

Don't get tricked by the items we didn't include in GDP!

  • Profits & Net Foreign Factor Income - These would be used in the Income Approach. They're "income", not an "expenditures"!
  • Depreciation - This is "added back" under the Income Approach, since it's subtracted out of net income.

While this one isn't used in Income Approach... we still exclude it.

  • Durable Expenditures & Nondurable Expenditures - These are already included under Consumption Expenditures! Including these would be double-counting.

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