1) The expenditure approach attempts to calculate GDP by
evaluating the sum of all final good and services purchased in an
economy. The components of U.S. GDP identified as “Y” in equation
form, include Consumption (C), Investment (I), Government Spending
(G) and Net Exports (X – M).
Y = C + I + G + (X − M) is the standard equational (expenditure)
representation of GDP.
- “C” (consumption) is normally the largest GDP component in the
economy, consisting of private expenditures (household final
consumption expenditure) in the economy.
- “I” (investment) includes, for instance, business investment in
equipment, but does not include exchanges of existing assets.
- “G” ( government spending ) is the sum of government
expenditures on final goods and services. It includes salaries of
public servants, purchase of weapons for the military, and any
investment expenditure by a government.
- “X” (exports) represents gross exports. GDP captures the amount
a country produces, including goods and services produced for other
nations’ consumption, therefore exports are added.
- “M” (imports) represents gross imports. Imports are subtracted
since imported goods will be included in the terms “G”, “I”, or
“C”, and must be deducted to avoid counting foreign supply as
domestic.
2) Income Approach
The income approach looks at the final income in the country,
these include the following categories taken from the U.S.
“National Income and Expenditure Accounts”: wages, salaries, and
supplementary labor income; corporate profits interest and
miscellaneous investment income; farmers’ income; and income from
non-farm unincorporated businesses. Two non-income adjustments are
made to the sum of these categories to arrive at GDP:
- Indirect taxes minus subsidies are added to get from factor
cost to market prices.
- Depreciation (or Capital Consumption Allowance) is added to get
from net domestic product to gross domestic product.