Methods of Measuring GDP : Expenditure Method

Introduction

• Expenditure method is the most commonly used way of estimating GDP.
• Expenditure method measures GDP by summing up final expenditures incurred by households, business firms, and government. 

Formula

• There are four main aggregate expenses to measure GDP which are household consumption, corporate investment, government spending on goods and services, and net exports, which are equivalent to exports minus imports of goods and services.
• The Formula for Expenditure GDP is: 

GDP=C+I+G+(X−M) 

                where, C: Consumer spending on goods and services

                              I: Investor spending on business capital goods 

                              G: Government spending on public goods and services 

                              X: Exports

 M: Imports

• The expenditure method gives a clear picture of the aggregate demand in the economy. 

Components of Expenditure Method

Consumer Spending (C)

• It is also referred to as consumption expenditure and it is the largest component of Indian GDP. It drives the aggregate demand in the economy. 
• Consumer spending is what households buy to fulfill everyday needs. It can be divided into two categories-purchase of durables and non-durables goods and procurement of services.

Investment (I)

• Investment  includes 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. In contrast to common usage, ‘Investment’ in GDP does not mean purchases of financial products. Buying financial products is classified as ‘saving ‘, as opposed to investment. 

Government Spending (G)

• It 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. 
• It does not include any transfer payments, such as social security or unemployment benefits. 
• The purposes of government spending are:

• To achieve improvements in the supply-side of the macro-economy, such as spending on education and training to improve labor productivity.
• To provide subsidies to industries that may need financial support for either their operation or expansion. 
• To help redistribute income and promote social welfare.

Net Exports (Export-Import)

• Exports represent gross exports. GDP captures the amount a country produces, including goods and services produced for other nations’ consumption, therefore exports are added.
• Imports represent 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.