Economics Online Tutor
| QUICK LINKS TO OTHER PAGES RELATING TO THE DEFINITION AND CALCULATION OF GDP AND NATIONAL INCOME ACCOUNTING: THE CIRCULAR FLOW MODEL AND BASIC GDP DEFINITION THE INCOME APPROACH TO GDP CALCULATION GDP AND OTHER NATIONAL INCOME MEASURES; NOMINAL AND REAL VALUES |
| The Expenditures Approach to GDP Calculation |
 |
 |
 |
 |
 |
 |
| THE FORMULA: GDP = C + I + G + NX WHERE: C = HOUSEHOLD CONSUMPTION I = GROSS DOMESTIC PRIVATE INVESTMENT G = GOVERNMENT PURCHASES OF GOODS AND SERVICES NX = NET EXPORTS AND NX = EXPORTS MINUS IMPORTS (X-M) GDP = C + I + G + (X-M) OR SIMPLY: GDP = C + I + G + X WHERE X IN THIS CASE IS THE SAME AS (X-M) ABOVE ======================= THESE THREE FORMS OF THE SAME FORMULA ARE LISTED HERE BECAUSE YOU ARE LIKELY TO SEE IT LISTED EACH WAY. |
Net Exports (NX) equals total exports minus total imports. Exports are added into GDP because they
represent goods and services that are produced within the economy but are not part of domestic
expenditures. Imports are subtracted because they represent spending on goods and services that
were not produced within the economy. Often this definition of net exports is reflected in the formula
that you see for GDP, so that the formula looks like this:
GDP = C + I + G + (X-M)
Where (X-M) is the same as the NX in the other version of the formula. Also, sometimes NX is written
simply as X, and students need to be aware that this X is different from the X in (X-M).
Often for economics class you will be given a list of different values and be asked to calculate GDP based
on the numbers on the list. GDP is easier to calculate using the expenditures approach than it is using
the income approach (discussed in the next section) because the expenditures approach includes fewer
categories of numbers, and the ones used are generally more straight-forward and easier to remember.
C + I + G + X is something that is much easier to remember than the formula for the income approach.
The discussion of GDP continues with a discussion of the income approach to calculating GDP. To
continue to the income approach section, click here.
represent goods and services that are produced within the economy but are not part of domestic
expenditures. Imports are subtracted because they represent spending on goods and services that
were not produced within the economy. Often this definition of net exports is reflected in the formula
that you see for GDP, so that the formula looks like this:
GDP = C + I + G + (X-M)
Where (X-M) is the same as the NX in the other version of the formula. Also, sometimes NX is written
simply as X, and students need to be aware that this X is different from the X in (X-M).
Often for economics class you will be given a list of different values and be asked to calculate GDP based
on the numbers on the list. GDP is easier to calculate using the expenditures approach than it is using
the income approach (discussed in the next section) because the expenditures approach includes fewer
categories of numbers, and the ones used are generally more straight-forward and easier to remember.
C + I + G + X is something that is much easier to remember than the formula for the income approach.
The discussion of GDP continues with a discussion of the income approach to calculating GDP. To
continue to the income approach section, click here.
Gross Domestic Product, or GDP
The circular flow model shows the interrelationship between the four
sectors of the economy: households, firms, government, and the
international sector. Since GDP is a measure of production for the entire
economy, it can be measured by adding together the expenditures for
production of each of these four components, or sectors. Using this
method to compute GDP is called the expenditures approach. The
expenditures approach uses a formula that should become familiar to all
students of macroeconomics:
GDP = C + I + G + NX
Where:
C = Consumption, or expenditures by the household sector
I = Gross Private Domestic Investment, or expenditures by the firms (or
business sector)
G = Government purchases of goods and services, or expenditures by the
government sector
NX = Net Exports, or expenditures by the international sector
Note that G does not include all government spending, but only spending
on purchases of goods and services. Total government spending also
includes transfer payments, or payments for such things as unemployment
compensation, welfare payments, and Social Security benefits. These
transfer payments are not included in GDP because they do not represent
current production in the economy. They only represent the transfer of
money from one segment of the economy to another.
The circular flow model shows the interrelationship between the four
sectors of the economy: households, firms, government, and the
international sector. Since GDP is a measure of production for the entire
economy, it can be measured by adding together the expenditures for
production of each of these four components, or sectors. Using this
method to compute GDP is called the expenditures approach. The
expenditures approach uses a formula that should become familiar to all
students of macroeconomics:
GDP = C + I + G + NX
Where:
C = Consumption, or expenditures by the household sector
I = Gross Private Domestic Investment, or expenditures by the firms (or
business sector)
G = Government purchases of goods and services, or expenditures by the
government sector
NX = Net Exports, or expenditures by the international sector
Note that G does not include all government spending, but only spending
on purchases of goods and services. Total government spending also
includes transfer payments, or payments for such things as unemployment
compensation, welfare payments, and Social Security benefits. These
transfer payments are not included in GDP because they do not represent
current production in the economy. They only represent the transfer of
money from one segment of the economy to another.
| This page, along with additional commentary, was posted on the "Economics Online Tutor" Facebook page's timeline on August 18, 2012. |