How to Calculate GDP With the Expenditure Approach

The expenditure approach to calculating gross domestic product (GDP) takes into account the sum of all final goods and services purchased in an economy over a set period of time. That includes all consumer spending, government spending, business investment spending, and net exports. Quantitatively, the resulting GDP is the same as aggregate demand because they use the same formula.

$\begin{aligned} &GDP = C + I + G + (X - M)\\ &\textbf{where:}\\ &C = \text{Consumer spending on goods and services}\\ &I = \text{Investor spending on business capital goods}\\ &G = \text{Government spending on public goods and services}\\ &X = \text{exports}\\ &M = \text{imports}\\ \end{aligned}$​GDP=C+I+G+(X−M)where:C=Consumer spending on goods and servicesI=Investor spending on business capital goodsG=Government spending on public goods and servicesX=exportsM=imports​

Expenditure is a reference to spending. Another word for spending is demand. The total spending, or demand, in the economy is known as aggregate demand. This is why the GDP formula is the same as the formula for calculating aggregate demand. Because of this, aggregate demand and expenditure GDP must fall or rise together.

However, this similarity isn't technically always there—especially when looking at GDP in the long run. Short-run aggregate demand only measures total output for a single nominal price level, or the average of current prices across the entire spectrum of goods and services produced in the economy. Aggregate demand only equals GDP in the long run after adjusting for price level.

There are several ways to measure total output in an economy. Standard Keynesian macroeconomics theory offers two such methods to measure GDP: the income approach and the expenditure approach.

Of the two, the expenditure approach is cited more often. Keynesian theory places extreme macroeconomic importance on the willingness for businesses, individuals and governments to spend money.

The main difference between the expenditure approach and the income approach is their starting point. The expenditure approach begins with the money spent on goods and services. Conversely, the income approach starts with the income earned from the production of goods and services (wages, rents, interest, profits).

In 1991, the United States officially switched from gross national product (GNP) to GDP.

Both GNP and GDP attempt to track the value of goods and services produced in an economy, but they use different criteria for determining this value.

GNP tracks the total value of goods and services produced by all citizens of the U.S., regardless of physical location. (It counts people who are living abroad, for example, and overseas investments). GDP tracks the value of all goods and services produced within the physical borders of the United States, regardless of national origin.

For example, the value of goods produced in the U.S. by foreign-owned businesses would be included in the GDP, but it wouldn't be included in the GNP. If a resident of the U.S. invests in property overseas and earns money from it, for example, then that value would be included in GNP, but it wouldn't be included in the GDP.