Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Find a Job
  • Home
  • Economics, Finance, & Analytics
  • Economic Analysis & Monetary Policy

Expenditure Method (GDP) - Explained

What is the Expenditure Method?

Written by Jason Gordon

Updated at March 17th, 2023

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is the Expenditure Method?How is the Expenditure Method Used?Main Components Under Expenditure MethodLimitation of GDP MeasureAcademic Research on the Expenditure Method

What is the Expenditure Method?

This expenditure method states that expenses of the government, private and public firms sum up the GDP. These indices contribute to the overall value of all finished goods and services over a period of time. In other words, the expenditure method is a means of calculating the gross domestic product through consumption, investment, government expenses and net export indices over a period of time. The method here does not account for inflation and at such, results in nominal GDP but when inflation is considered, the real GDP is estimated.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

How is the Expenditure Method Used?

GDP is mostly calculated using the expenditure method by adding up all of the expenses made on final goods and services. There are four considerations when calculating GDP, they are household consumption, business investments, government expenses and net exports (exports excluding goods and services imported). These indices are used by the expenditure method to estimate the GDP.

Main Components Under Expenditure Method

Consumer spending is focussed on in the expenditure method of the United States. This is divided into purchases of durable (cars, computers, and others) and nondurable goods (clothing, food, and others). Another component considered is government expenses. Factors such as expenses on defense and non-defense goods such as weapons, drugs, and books are of utmost concern. Business investment component includes firms expenses on acquiring assets such as real estate, equipment, manufacturing facilities, and plants. This is one of the unpredictable components in estimating GDP. Net exports refer to the implication associated with foreign trade of goods and services on the economy. This is the last component considered in estimating GDP using the expenditure method.

Limitation of GDP Measure

Economist Joseph Stiglitz notes that GDP is supposed to measure a country's standard of living. But GDP has failed in this objective because it excludes factors that make the citizens of a country smile or happy such as work-life balance and interpersonal relationships. As such, GDP should not be taken as a perfect measure and indication of a society's well being.

Related Topics

  • Gross Domestic Product (GDP)
  • Nominal GDP
  • Per Capita GDP
  • Expenditure Method



expenditure method expenditure interpretation

Was this article helpful?

Yes
No

Related Articles

  • Bureau of Economic Analysis - Explained
  • Balance of Trade - Explained
  • Abenomics - Explained



©2011-2023. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand