Expenditure approach is a method of calculating the gross domestic product (GDP) by adding up all spendings for the final goods and services produced in a country within a certain period. This approach is one of three GDP calculation approaches in addition to the income approach and the output approach.
In theory, all three must produce the same number. However, errors often arise due to inaccurate data sources and data collection methods. In economics, we call this error as the statistical discrepancy.
The formula in the expenditure approach
In this approach, we add up all expenditures from the four macroeconomic sectors, the household, business, government, and external sectors. Following is the formula for calculating GDP using the expenditure approach:
GDP = C + I + G + (N-X)
Where:
- C = consumer spending
- I = gross private domestic investment, which comprises investment in capital assets and changes in inventories
- G = government expenditure
- X = exports represent foreign demand for domestic products and services
- M = imports represent domestic spending for foreign products and services