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Macroeconomic Measurements
Approaches to Calculating GDP
The Expenditures Approach
Page 1 of 2
The gross domestic product is the market value of all final goods and services produced in an
economy in a given period of time. Suppose it’s your job to calculate the gross domestic product of
the United States economy in 2005. How would you go about doing that? Well, keep in mind that
every transaction in the economy has two sides: the buyer and the seller. From the buyer’s
perspective the transaction represents spending. From the seller’s perspective it’s income.
We’ve already looked at an income approach to calculating gross domestic product. Now we’re
going to focus on the expenditure approach. Your job would be to make a list of all of the groups in
the economy that are spending money, and see how much is spent by each group. Add them up
and you’ll get total gross domestic product. The total gross domestic product of the U.S. economy
in 2005 is $12.8 trillion. Let’s find out how that breaks down into different categories of spending by
different agents.
The first group of spenders are households, and we call their spending consumption. Total
consumer spending in 2005 was $8.9 trillion spent on food, clothing, entertainment, education, the
stuff that households buy. It’s the biggest component of spending in the gross domestic product
and accounts in 2005 for 70% of the total.
The next group of spenders are businesses, and business spending is called investment. In 2005,
it’s 17% of the total, spent on plant and equipment, research and development expenditures, new
factories and buildings. Investment spending is spending on goods to produce other goods.
Investment spending includes the accumulation of new inventories. It also includes spending by
households on new houses. Investment spending is important because it influences the productivity
of the economy, and we want to make a distinction here between gross investment and net
investment in a given period. Gross investment is the total spending on investment goods. Net
investment takes account of the fact that some of the machines previously purchased have begun to
wear out or become obsolete. This is called depreciation. The difference between gross investment
spending and depreciation is net investment for a given period of time. Net investment in a given
year says how much new plant and equipment has been added to the total capital stock of the
economy.
The third category of spending is spending by the government. The government spending was 19%
of GDP in 2005. This is spending by the government on goods and services, new roads and bridges.
It doesn’t include, however, transfer payments, such as unemployment insurance, public assistance,
and social security. Only spending on goods and services.
Macroeconomic Measurements
Approaches to Calculating GDP
The Expenditures Approach
Page 2 of 2
That brings us now to the final category of spending and that is net exports. Net exports adjusts for
the fact that some of the goods produced in this country in a given period of time are sold to people
who live somewhere else, and their spending isn’t counted as part of the economic activity in our
economy. On the other hand, some of the goods that we’re actually spending money on are
produced somewhere else. Gross domestic product, remember, is trying to measure total
production, so we’ve got to take account of spending on goods that are produced other places and
people in other places spending on goods produced here. We do that by taking the difference
between our exports and our imports. Exports are goods that we’re producing in this country and
selling to folks living abroad. Imports is spending in this country that’s actually being spent on
goods produced in other countries. Subtracting imports from exports gives net exports, and in 2005
that adjustment was 6% of our total GDP; 6% with a negative sign because exports are less than
imports in 2005. The U.S. is running a trade deficit. Now in order to find total gross domestic
product simply add up the spending in each of those four categories. Consumption plus investment
plus government spending plus net exports equals total GDP. In this lesson, then, we’ve illustrated
the expenditure approach to calculating gross domestic product. You can use the expenditure
approach or the income approach because every transaction has two sides and in the end spending
equals income.