In economics, the expenditure approach is a method of measuring the gross domestic product (GDP). The expenditure approach calculates GDP by adding up all final expenditures in an economy. This includes-
- consumption,
- investment,
- government spending, and
- net exports.
The Expenditure Approach is a method of measuring GDP that focuses on the total spending by all sectors of the economy. This approach is also known as the expenditure-output approach or the aggregate expenditure model. The Expenditure Approach is one of three ways to measure GDP, which also includes the Income Approach and the Output Approach.
In order to calculate GDP using the Expenditure Approach, we must first understand what components make up total spending. Total spending consists of four main components: consumption, investment, government spending, and net exports.
Consumption
Consumption is defined as household spending on goods and services. This includes expenditures such as-
- food,
- clothing,
- housing,
- healthcare,
- transportation, and
- entertainment.
Investment
Investment refers to business spending on capital goods (such as factories and machinery) and inventory (raw materials used in production).
Government spending
Government spending includes local, state, and federal government expenditures on public goods and services (such as roads, schools, and defense).
Net exports
Net exports are exports minus imports. Exports are Goods & Services produced domestically but sold abroad while Imports are foreign Goods & Services bought by domestic residents.
What is Expenditure Approach With an Example?
The expenditure approach to GDP calculation views GDP as the sum of final expenditures on goods and services. This approach is also known as the “outlay” or “expenditure” method. The main types of expenditures included in this approach are:
1) Personal consumption expenditures (C): This includes spending by households on durable and nondurable goods, services, and interest payments. Examples include spending on food, clothing, shelter, healthcare, and education.
2) Gross private domestic investment (I): This includes spending by businesses on fixed assets such as machinery and buildings, as well as inventory changes. It also includes residential construction spending.
3) Government consumption expenditures and gross investment (G): This includes spending by all levels of government on final goods and services such as defense, infrastructure, education, and health care. It also includes transfer payments made by the government to individuals such as Social Security benefits.
4) Net exports of goods and services (X-M): This represents the value of exports minus imports. Exports are counted positively while imports are counted negatively since they represent a leakage from the domestic expenditure. For example, if a country exports $100 worth of goods but imports $120 worth of goods, then net exports would be -$20 for that country.
What is the Expenditure Approach Formula?
In macroeconomics, the expenditure approach is a measure of economic activity. The expenditure approach equals total final expenditures in the economy. This includes private consumption, gross investment, government spending, and net exports.
The expenditure approach is also known as aggregate demand or simply demand. The formula for the expenditure approach is: Y = C + I + G + NX
Where:
- Y is GDP (gross domestic product)
- C is private consumption
- I is a gross investment
- G is government spending
What are the 4 Categories of the Expenditures Approach?
The four categories of the expenditures approach are:
1. Personal consumption expenditure: This includes spending on goods and services by households.
2. Gross private domestic investment: This includes spending on fixed assets and inventory by businesses.
3. Government consumption and investment: This includes spending on goods and services by all levels of government.
4. Net exports: Net exports are exports minus imports. Exports are Goods & Services produced domestically but sold abroad while Imports are foreign Goods & Services bought by domestic residents.
In macroeconomics, the expenditure approach is a measure of aggregate demand. It estimates the total amount of spending in the economy by households, businesses, and the government. The expenditure approach is also known as the aggregate demand model.
