Our first article on this website. 🙂
In this article, we would cover the expenditure approach to measure GDP. There are other two approaches as well, which we will discuss in the coming articles. The other two are from the perspective of income and production.
GDP stands for Gross Domestic Product. It shows how much we have spent on goods and services. If you want to know the health of an economy at a certain point in time, just look at GDP figures.
To determine GDP through an expenditure approach, we mainly have to study four components. These are –
- Consumption Expenditure (C),
- Investment (I),
- Government purchases (G) and,
- Net exports (NX).
And, when we add these four components, we arrive at the final GDP figure, Y. So, this is how it unfolds –
Y=C+I+G+NX
Four components of GDP
Now, let’s understand a bit about all of these components in this section. We start with consumption expenditure first –
- Consumption Expenditure (C) – It is the total expenditure on consumer goods and services. Expenditure on Consumer goods could be on durable or non-durable goods. While the services may include medical services, education, banking & finance, etc.
- Investment (I) – The investment could be – residential or industrial. We need plants, and machinery to produce goods and services. Both of these would require an initial investment to kick-start things.
- Government purchases (G) – it is the Government spending on goods and services. It doesn’t include transfer payments, interest payments on debt, etc.
- Net exports (NX) – The difference between exports and imports provide the net exports (Exports – Imports). When the net exports are negative, then that means we are buying more foreign goods and services. When it’s positive, then it means we are exporting more i.e. selling our goods and services to foreign nations.
If you want to know about U.S. GDP figures. Then, these are available on the U.S. Bureau of Economic Analysis (BEA) website.
In conclusion, GDP data provides us the information about the level of economic activity in a nation. Here, we covered the expenditure approach to measure GDP. In the next article, we cover the Production approach to measure GDP.
