The Expenditure Approach to GDP

Key Takeaways

1. 1GDP = C + I + G + (X − M) is the expenditure-approach formula, the most widely reported way GDP is calculated
2. 2Consumption is by far the largest component of GDP - around 68% of U.S. GDP - covering household spending on goods and services
3. 3Investment includes business spending on equipment, structures, and inventory; it's roughly 17% of GDP
4. 4Government spending includes both consumption (salaries, supplies) and investment (infrastructure, defense)
5. 5Net exports equals exports minus imports; for most developed economies this figure is negative, reflecting a trade deficit
6. 6Each component carries a different multiplier effect and a different degree of economic significance
7. 7Breaking GDP down by expenditure helps predict recessions, identify growth drivers, and spot economic imbalances
8. 8The approach implicitly assumes that all spending on final goods equals the value of output produced