Gross domestic product (GDP) is the market value of all final goods and services produced within the national borders of a country for a given period of time. GDP can be determined in multiple ways. The income approach and the expenditure approach highlighted below should yield the same final GDP number .
Simple view of expenditures
In an economy, households receive wages that they then use to purchase final goods and services. Since wages eventually are used in consumption (C), the expenditure approach to calculating GDP focuses on the end consumption expenditure to avoid double counting. The income approach, alternatively, would focus on the income made by households as one of its components to derive GDP.
Expenditure Approach
The expenditure approach attempts to calculate GDP by evaluating the sum of all final good and services purchased in an economy. The components of U.S. GDP identified as "Y" in equation form, include Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).
Y = C + I + G + (X − M) is the standard equational (expenditure) representation of GDP.
- "C" (consumption) is normally the largest GDP component in the economy, consisting of private expenditures (household final consumption expenditure) in the economy. Personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services.
- "I" (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Spending by households (not government) on new houses is also included in Investment. "Investment" in GDP does not mean purchases of financial products. It is important to note that buying financial products is classed as 'saving,' as opposed to investment.
- "G" (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. However, since GDP is a measure of productivity, transfer payments made by the government are not counted because these payment do not reflect a purchase by the government, rather a movement of income. They are captured in "C" when the payments are spent.
- "X" (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
- "M" (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms "G", "I", or "C", and must be deducted to avoid counting foreign supply as domestic.
Income Approach
The income approach looks at the final income in the country, these include the following categories taken from the U.S. "National Income and Expenditure Accounts": wages, salaries, and supplementary labor income; corporate profits interest and miscellaneous investment income; farmers' income; and income from non-farm unincorporated businesses. Two non-income adjustments are made to the sum of these categories to arrive at GDP: