Expenditure Approach For GDP Definition
Expenditure Approach is one of the approaches or methods of calculating the Gross Domestic Product (GDP) of the country by the way of adding the entire spending of the economy including the amount of consumption of goods and services by the consumer, amount of spending on the investments, spending of the government of the country on the infrastructures and the net exports of the country.
Components of Expenditure Approach GDP
There are many ways to measure an economy’s Gross Domestic Product one of those methods is to calculate the final expenditure, therefore, this method has four components which essentially covers all of the expenditures:
- First is the consumer spending on acquiring goods and services as every individual is also a consumer in an economy
- Second is gross Investor spending for acquiring business capital goods which are used for the production of goods and services
- Third the government spending on various public goods and services which is essentially the primary task of any government
- Last is the net importsNet ImportsNet Importer is a nation that imports (buys) more goods & services from other countries than what it exports (sells) to them. Usually, it has a negative balance of trade that may indicate the country’s future exchange rates & savings rate. read more i.e. total amount of exports as compared to the total amount of imports during the period under consideration which will give a better picture as to whether a country is in a Trade Deficit or Trade Surplus.
Therefore almost all of the expenditure will fall in any of the four categories mentioned above and by adding all of the four types of expenditures we will get the GDP numbers.
Expenditure Approach GDP Formula
The formula for the calculation of the Gross Domestic Product (GDP) of the country using the expenditure approach is as follows:
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For eg:
Source: Expenditure Approach for GDP (wallstreetmojo.com)
Where,
GDP = Gross Domestic Product
- C = the amount of spending on the consumption of goods and services by the consumer
- I = the total amount of spending on the investments in the capital assets by the private sector and the government
- G = Spending of the government on the infrastructures to boost the economy of the country.
- NX = Net exports of the country
Example of Expenditure Approach
For example, one of the economists of the country wants to calculate the Gross domestic product of the country for the purpose of his analysis. For this purpose, the economist decided to follow the expenditure approach. The following are details of the spending in the country:
- The amount of spending on the consumption of goods and services by the consumer: $75,000
- The total amount of spending on the investments in the capital assets by the private sector and the government: $150,000
- Spending of the government to boost the economy of the country: $180,000
- Net exports of the country: $100,000
Calculate the Gross domestic product (GDP) of the country using the expenditure approach.
Solution:
The formula for the calculation of the Gross Domestic Product (GDP) of the country using the expenditure approach is as follows:
GDP = C + I + G + NX
Thus the Gross domestic product (GDP) of the country using the expenditure approach comes to $505,000.
Advantages of Expenditure Approach
- It is simple to understand and easy to calculate and universally can be used to compare figures with other nations.
- It does help the economist and the other persons concerned in formulating a general direction in which an economy may be heading.
Limitations/Disadvantages
The various limitations or the disadvantages related to the Expenditure Approach are as follows:
- It forgoes certain aspects like quality of goods and services produced and most of the time black economy or underground economy data is not even considered for calculating such a figure.
- Often it is argued in the community about the quality and accuracy of the data collected and the method used to collect such data.
- It does not account for those transactions which do not involve monetary quid pro quo.
- Sustainability of environment and growth is also ignored while formulating such figures as it takes into consideration essentially historical data.
- Inflation is also a major factor and currency value in the international market is also a pivotal factor that it seems to ignore.
Important Points
The various different important points related to the expenditure approach are as follows:
- There are three methods for the calculation of the gross domestic product (GDP) in the country which include expenditure approach, Production or the Value-Added Approach and the Income approach.
- There are four components used for the calculation of gross domestic product (GDP) of the country using expenditure approach which includes the amount of spending on the consumption of goods and services by the consumer, the total amount of spending on the investments in the capital assets by the private sector and the government, Spending of the government on the infrastructures to boost economy of the country and the net exports of the country.
Conclusion
- Thus the Expenditure Approach is among the three methods for the calculation of the Gross domestic product in the country where other includes Production or the Value-Added Approach and the Income approach.
- According to this approach gross domestic product (GDP) of the country is calculated by the way of adding the entire spending of the economy and it is the commonly used out of all the approaches available.
- It is simple to understand and easy to calculate and universally can be used to compare figures with other nations.
- However, it forgoes certain aspects like the quality of goods and services produced and most of the time black economy or underground economy data is not even considered for calculating such figures.
- Also, it is argued often in the community concerned about the quality and accuracy of the data collected and the method used to collect such data.
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