expenditure approach

(noun)

The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M)) GDP = C + I + G + (X-M).

Related Terms

Examples of expenditure approach in the following topics:

  • Defining GDP

    • The income approach and the expenditure approach highlighted below should yield the same final GDP number .
    • The expenditure approach attempts to calculate GDP by evaluating the sum of all final good and services purchased in an economy.
    • The income approach looks at the final income in the country, these include the following categories taken from the U.S.
    • 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.

  • Calculating GDP

    • GDP can be calculated through the expenditures, income, or output approach.
    • There are a few methods used for calculating GDP, the most commonly presented are the expenditure and the income approach.
    • Both of these methods calculate GDP by evaluating the final stage of sales (expenditure) or income (income).
    • The most well known approach to calculating GDP, the expenditures approach is characterized by the following formula:
    • GDP at producer price theoretically should be equal to GDP calculated based on the expenditure approach.

  • Gross Domestic Product

    • The expenditure approach works on the principle that all products must be bought by a consumer; therefore, the value of the total product must be equal to consumers' total expenditures.
    • This approach determines GDP by finding the sum of all producers' incomes.
    • The expenditure approach only measures products that are intended to be sold.
    • Components of GDP by expenditure are:
    • The production approach is also known as the Net Product or Value Added method.

  • National Income

    • The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces:
    • The income approach equates the total output of a nation to the total factor income received by residents or citizens of the nation:
    • The expenditure approach focuses on finding the total output of a nation by finding the total amount of money spent and is the most commonly used equational form:
    • GDP = C + I + G + ( X - M ); where C = household consumption expenditures / personal consumption expenditures, I = gross private domestic investment, G = government consumption and gross investment expenditures, X = gross exports of goods and services, and M = gross imports of goods and services.
    • The expenditure approach is a common method for evaluating the value of an economy at a given point in time.

  • Other Approaches to Calculating GDP

    • The income approach evaluates GDP from the perspective of the final income to economic participants.
    • It can be measured a few different ways and the most commonly used metric is the expenditure approach; however, the second most commonly used measure is the income approach.
    • The income approach unlike the expenditure approach, which sums the spending on final goods and services across economic agents (consumers, businesses and the government), evaluates GDP from the perspective of the final income to economic participants.
    • "National Income and Expenditure Accounts" divide incomes into five categories:
    • By definition, the income approach to calculating GDP should be equatable to the expenditure approach (Y = C + I+ G + (X - M)).

  • Calculating Economic Growth

    • There are three approaches used to determine the GDP:
    • Product (output) approach: adds together the outputs of every class of enterprise to provide the total.
    • Expenditure approach: the value of the total product must be equal to the people's total expenditures.
    • In principle, all of the approaches should yield the same result for the GDP of a country.
    • For example, the equation for the expenditure approach is: GDP = C + I + G + (X - M).

  • Learning from GDP

    • GDP can be evaluated by using an output approach, income approach, or expenditure approach.
    • The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces.
    • The income approach equates the total output of a nation to the total factor income received by residents or citizens of the nation.
    • The expenditure approach is basically an output accounting method.
    • Formula: Y = C + I + G + (X - M) ; where: C = household consumption expenditures / personal consumption expenditures, I = gross private domestic investment, G = government consumption and gross investment expenditures, X = gross exports of goods and services, and M = gross imports of goods and services.

  • GDP Equation in Depth (C+I+G+X)

    • These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services.
    • Only expenditure based consumption is counted.
    • Government spending (G) is the sum of government expenditures on final goods and services.
    • Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count.
    • Components of the expenditure approach to calculating GDP as presented in the National Income Accounts (U.S.

  • Free Cash Flow

    • Free cash flows = EBIT x (1 - Tax rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditure
    • Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
    • Where Net Capital Expenditure (CAPEX) = Capex - Depreciation & Amortization and Tax Shield = Net Interest Expense X Effective Tax Rate
    • Free cash flows = Cash flows from operations - Capital Expenditure ""
    • The second difference is that the free cash flow measurement deducts increases in net working capital, where the net income approach does not.

  • Defining Aggregate Expenditure: Components and Comparison to GDP

    • Aggregate expenditure is the current value of all the finished goods and services in the economy.
    • The equation for aggregate expenditure is: AE = C + I + G + NX.
    • Government expenditure can include infrastructure or transfers which increase the total expenditure in the economy.
    • The GDP is calculated using the Aggregate Expenditures Model .
    • This graph shows the aggregate expenditure model.