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Expenditure Method

Reviewed by Komal | Updated on Feb 19, 2021

Catalogue

What is the Expenditure Method?

The expenditure method is a gross domestic product (GDP) measurement scheme, which incorporates consumption, production, government spending, and net exports. It is the most commonly used way of estimating GDP.

It says that the private sector, including customers and private firms, and government spending within a country's borders, will add up to the total value of all finished goods and services produced over a period of time. This process produces nominal GDP, which then has to be modified for inflation in order to produce actual GDP.

This method contrasts with the income approach for calculating GDP.

How Does the Expenditure Method Work?

Expenditure is similar to spending. In economics, demand is another word for consumer spending. In the economy, total spending or production is called aggregate demand. That is why the formula for GDP is actually the same as the formula for the aggregate demand calculation. As a consequence, aggregate demand and expenditure must decrease or increase in tandem.

Nonetheless, scientifically this similarity is not always present in the real world, especially when analyzing GDP over the long run. Short-run aggregate demand only calculates total output at a single nominal price point or the average current prices across the whole range of economically manufactured goods and services. In the long run, aggregate demand is equal to GDP only when the price level is adjusted.

How to Calculate GDP using the Expenditure Method?

The method of expenditure is the most commonly used technique for calculating GDP, which is a calculation of the production of the economy produced within the boundaries of a country regardless of who owns the means to produce. Under this process, the GDP is determined by summing up all of the final goods and services expenditure.

There are four main aggregate expenses to measure GDP: household consumption, corporate investment, government spending on goods and services, and net exports, which are equivalent to exports minus imports of goods and services.

*The Formula for Expenditure GDP is: *

*GDP=C+I+G+(X−M) * where: C: Consumer spending on goods and services I: Investor spending on business capital goods G: Government spending on public goods and services X: Exports M: Imports