Expenditure Method in calculating GDP

Final goods and services produced in a country during a period of time are taken into account under the expenditure method of calculating National Income or Gross Domestic Product. In this method, the final expenditure made by each stakeholder is taken into account

Final expenditure is that part of the expenditure that is undertaken not for intermediate purposes.

Following is the formula for calculating GDP by expenditure method;

  • GDP = C + I + G + (X − M)

C (Consumption) represents the consumption expenditure by the households on Final goods and services, known as Private Final Consumption Expenditure (PFCE).

I (Investment) represents a business investment in equipment. It includes Gross Fixed Capital Formation (GFCF) and Inventory.

  • GFCF includes business expenses incurred towards long-term assets and investment in residential units by businesses or households.
  • Inventory investment includes investment for procuring raw materials and finished or unfinished goods.

It doesn’t include investment in financial products.

G (Government) represents the sum of government expenditures on final goods and services including salaries, weapons, investments, etc., also known as Government Final Consumption Expenditure (GFCE).

X represents gross exports and M represents gross imports. Balance of both is called net exports.

Net Export(NX) = Value of goods exported (X) minus the value of goods imported (M)  

                              NX= (X – M)  

Thus   

                                 GDP = C + I + G + NX 

Print Friendly and PDF