Under the expenditure method, GDP is the sum of the final expenditure on goods and services produced in a country measured at market prices. There are four main spending sectors: Household consumption (C), Firms (l), Government (G) and Foreign sector (XM). Symbolically,
GDP = C+1+G+(X-M)
Where C = Household spending on consumption i.e. personal consumption expenditure. This is made up of expenditure by households on durable and non-durable goods and services. For example, household expenditure on plantain, cars, shoes, etc.
I = Capital investment spending measured as gross private domestic investment, i.e. business fixed investment e.g. plant and machinery, all construction such as business and residential buildings, and changes in inventory.
G = General government spending i.e. government purchases of final goods and services. They consist of central government expenditure on defence, wages and salaries of government employees and other expenditure on and by local authority. However, it excludes all government transfer payments because such outlays do not reflect any current production.
(X-M) = Net exports. These consist of exports of goods and services minus imports of goods and services.
Having identified the spending sectors, we now begin to sum them up.
The first stage is to calculate total spending in the domestic economy on all goods and services whether produced locally or imported for an accounting period. This is referred to as Total Domestic Expenditure at market prices (TDE). That is,
TDE = C+I+G.
The second stage is to compute Gross Domestic Expenditure (GDE) which is identical to GDP. GDE is total spending on domestically produced goods and services. Since TDE is total spending in a country on goods and services whether produced in the country or imported we need to adjust the TDE to arrive at GDE. There are two adjustments:
- Exports are goods produced within the domestic economy but exported. If we are interested in total value of output, which is GDE, we must determine the value of current output exported and add it to TDE.
- Imports, on the other hand, are goods and services we spend money on but are not produced within the domestic economy and must be subtracted from TDE to have GDE.
GDE = C+I+G+(X-M).
GDE is calculated using market prices hence it must be converted to factor cost. This is done by subtracting indirect taxes and adding subsidies to GDE at market prices. From GDE at factor cost, we add or subtract Net Property Income (NPI) to obtain GNE at factor cost. That is,
GNE at factor cost = GDE at factor cost ± NPI.
Finally, we subtract depreciation from GNE at factor cost to get NNE at factor cost which is referred to as national income.