GDP: Expenditure Approach
Gross domestic product (GDP) represents the value of all final goods produced and services delivered within the geographical boundaries of a region (city, state, country) in a period (most commonly a year).
There are two commonly used approaches to calculate GDP: the expenditures approach and the income approach. The production approach is also another possible alternative.
The GDP under the expenditures approach is calculated by adding up all the expenditures made on final goods and services produced within the geographical boundaries of a region. These include consumption expenditure (by households), investment expenditures (by businesses), government expenditures (on purchase of goods and services) and net expenditures by foreigners (i.e. net exports which in turn equals total exports minus total imports).
The GDP under the expenditures approach is calculated using the following formula:
GDP = C + I + G + (X − M)
C stands for personal consumption expenditures and it represents the spending by individuals on goods and services for personal use. Examples of expenditures that fall under this heading includes: spending on purchase of durable goods (such as cars, computers, etc.), non-durable goods (such as bread, milk, etc.) and on purchase of services (such health, entertainment, haircuts, etc.)
I stands for gross private investment and it represents the spending by entrepreneurs to sustain and grow their business. Examples of expenditures falling under gross private investment includes: fixed investment (purchase of final plant and machinery, business tools, etc.), construction for assets (residential and others) and changes in inventory levels, etc. However, it excludes a mere transfer of existing assets from one party to another (such as purchase of securities on the stock exchange, purchase of a resold asset, etc.)
G stands for government expenditures and gross investment and it represents the spending by government on consumption and on investment in new infrastructure, etc. Examples of expenditures falling under this heading include: salaries of government officers, expenditure on stationery and equipment used by government, expenditure on training of government officials, expenditure on construction of new high ways, parks, etc.
(X − M) equals net exports. X stands for exports and represents the purchase of goods produced in a region that are consumed by foreigners. M stands for imports and represents the purchase of foreign goods and services.
Since GDP sums up all production within geographical boundaries of a region, it must include the output that is purchased by foreigners and exclude the portion of C, I and G that is expended on foreign goods and services.
US national income data can be extracted from a database maintained by the US Bureau of Economic Analysis (BEA) which can be accessed here.
Based on BEA records, US GDP data from 2012 and first quarter of 2013 is given below:
|Gross Domestic Product|
[Billions of dollars] Seasonally adjusted at annual rates
Bureau of Economic Analysis
Last Revised on: May 30, 2013 - Next Release Date June 26, 2013
|1||Gross domestic product||15,478||15,586||15,811||15,864||GDP|
|2||Personal consumption expenditures||11,007||11,067||11,154||11,250||C|
|7||Gross private domestic investment||2,032||2,042||2,080||2,095||I|
|11||Equipment and software||1,141||1,155||1,150||1,186||1,200|
|13||Change in private inventories||73||55||82||23||48|
|14||Net exports of goods and services||-616||-577||-517||-530||X − M|
|25||State and local||1,847||1,843||1,852||1,852||1,846|
Find the values of C, I, G and (X − M) for the first quarter of 2013 and sum them up to find GDP for first quarter of 2013.
C = durable goods + non-durable goods + services = 1,274 + 2,599 + 7,500 = 11,373
I = structures + equipment & software + residential + change in inventories
I = 478 + 1,200 + 425 + 48 = 2,151
G = national defense + non-defense + state and local = 769 + 409 + 1,846= 3,024
X − M = Line 16 + Line 17 − Line 19 − Line 20 = 1,546 + 658 − 2,287 − 460 = -543
GDP = C + I + G + X − M = 11,373 + 2,151 + 3,024 − 543 = 16,005
Written by Obaidullah Jan, ACA, CFA