Expenditure Approach to Calculating GDP

The expenditure approach calculates GDP by summing the four possible types of expenditures as follows:

Consumption is the largest component of the GDP. In the U.S., the largest and most stable component of consumption is services. Consumption is calculated by adding durable and non-durable goods and services expenditures. It is unaffected by the estimated value of imported goods.

Investment includes investment in fixed assets and increases in inventory.

Government purchases are equal to the government expenditures less government transfer payments (welfare, unemployment payouts, etc.)

Net exports are exports minus imports. Imports are subtracted since GDP is defined as the output of the domestic economy.

Alternative Approaches to Calculating GDP

There are three approaches to calculating GDP:

• expenditure approach - described above; calculates the final spending on goods and services.
• product approach - calculates the market value of goods and services produced.
• income approach - sums the income received by all producers in the country.

These three approaches are equivalent, with each rendering the same result.