Practice
GDP by the expenditures approach
Add consumption, investment, government purchases and net exports, and leave out what is not spending on final output.
The skill
The expenditures approach adds up spending on final goods and services: GDP equals consumption plus investment plus government purchases plus net exports. Net exports are exports minus imports, and they can be negative. Leave out government transfer payments such as unemployment benefits, because nothing is produced in exchange for them; they reach GDP only when the people who receive them spend the money. Adding imports instead of subtracting them is the other common slip.
A worked example
The table shows a year of data for an economy, in billions of dollars.
| Item | Amount |
|---|---|
| Government transfer payments, such as unemployment benefits | 100 |
| Imports | 450 |
| Investment spending by firms | 150 |
| Government purchases of goods and services | 450 |
| Consumption spending by households | 1,330 |
| Exports | 260 |
Using the expenditures approach, what is GDP, in billions of dollars?
Solution
- Net exports = exports − imports = 260 − 450 = −190.
- Transfer payments are not purchases of goods or services, so they are not part of GDP; they reach GDP only when the people who receive them spend the money.
- GDP = C + I + G + net exports = 1,330 + 150 + 450 − 190 = $1,740 billion.
Answer: 1740