The Components of the Expenditure & Income Approaches to Computing GDP

When calculating GDP using the expenditure approach, components such as consumption, investment, government expenditure, and net exports are used. Consumption is all private consumer costs in a country’s economy, which include durable goods with a life expectancy of more than 3 years, non-durable goods, and services. Investment is the amount of investment a country has spent on capital equipment, inventories, and housing.

Government expenditure includes general public expenses, which include wages of government employees, road construction and repairs, and expenditures on public schools and the military. Also, an essential component is an indicator such as net exports, which can be calculated by subtracting total imports from the total exports of a country. Thus, the expenditure approach to computing GDP is one of the most commonly used GDP formulas, which looks like this:

GDP = C + I + G + NX

The income approach to computing GDP is the sum of such indicators as total national income, sales, taxes depreciation, and net foreign factor income. Total national income is the amount of all salaries, rent, interest, and profits. Sales taxes include consumption taxes that the government levies on the sale of goods and services. Depreciation is the cost associated with a tangible asset over its useful life. Net foreign factor income is the difference between income from foreign factors of production paid to other countries and income from national factors of production located abroad. Thus, in this GDP formula, the total income from the goods and services produced is taken.

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