Question

Discuss in detail how national economic performance can be measured using GDP’s expenditure approach.

Answer 1

There are three primary ways of calculating GDP: first, by adding up what everyone earned in a year (known as the income approach) or by adding up what everyone spent in a year (the expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non-incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending, and net exports.

Finally, GDP can equivalently be measured based on the value of goods or services produced in an economy over the course of the year (the production or output approach). Because economic output requires expenditure and is, in turn, consumed, these three methods for computing GDP all arrive at the same value.

In general, the following simplified equation is often employed to calculate a nation's GDP:

GDP = C + G + I + NX

where:

• C = consumption;
• G = government spending;
• I = investment; and
• NX = net exports.