Wize AP Macroeconomics Textbook > Measuring a Nation's Income
GDP - Expenditure Approach
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GDP - Expenditure Approach
The real GDP using the expenditure approach looks at all the spending in a given year in a country:
- Consumption (C) - expenditure by consumers on household goods and services (but not on housing). This could be on durable goods (fridge, cars) and non-durable goods (gas, food). Consumption is the largest component of GDP. Example: consumer spending on goods like clothes and books, or on services like dentists and cell phone service.
- Investment or Gross Investment (I) - expenditure by firms on capital equipment, inventories, factories, and machinery. It also includes all non-residential and residential construction (household purchases of new housing). It is also called fixed gross capital formation in the national accounts. Example: Tesla buying new machinery or equipment for the production of their electric cars.
Depreciation - reduction in the value of a fixed asset (like factories and machinery
Example: If the gross investment by Tesla is $100 million on new machines this year and their old machines depreciated by $20 million then the net investment this year is
100 - 20 = $80 million
- Government Expenditure (G) - this includes spending by the government on goods and services. There are two groups: government investment spending (like roads and bridges) and government spending (like health care and education equipment/machinery). This does not include transfer payments (like employment insurance, welfare payments, and pension) because these payments were not used for any production or service in the economy so they are not included in GDP.
- Net Exports (NX) - this is exports (X) minus imports (IM). Exports are goods and services we sell to foreign countries and imports are goods and services we buy from foreign countries. Example: If we export $200 million worth of goods to other countries and import $250 million worth of goods from other countries then our net exports are200 - 250 = $-50 million
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Example: GDP - Expenditure Approach
Which of the following should be included under investment in GDP using the expenditure based approach?
A) The purchase of shares in Toyota
B) The purchase of a partnership in a book store
C) The purchase of a car
D) The accumulation of inventory by a firm
D
Inventory falls under investment expenditure.
Practice: GDP - Expenditure Approach
Which of the following should be included under investment in GDP using the expenditure based approach?
Practice: GDP and Investment Expenditure
A good produced in 2008 and held in inventory until it is sold in 2010 would be included in which year’s GDP?
Practice: GDP and Inventory
A firm produces consumer goods and adds some to inventory in the third quarter. In the fourth quarter the firm sells the goods at a retail outlet that leaves its inventory diminished. As a result of these actions, what component(s) of GDP change in the fourth quarter?