19 Expenditure Approach
Expenditure Approach
In the goods market, households, firms, governments, and foreigners buy goods and services.
- Consumption expenditure , C , is the expenditure by households on consumption goods and services. This includes both durable goods (meant to last 3 or more years) and nondurable goods.
- Investment , I , is the purchases of new capital goods (tools, instruments, machines, buildings, and other durable items), purchases of new homes by households, and additions to inventories. Investment does not include purchases of stocks and bonds, as these are not produced goods or services.
- Government expenditures on goods and services , G , is the expenditures by all levels of the government on goods and services. Government transfer payments, such as Social Security payments, are not part of government expenditures on goods and services because these expenditures include only funds used by the government to buy goods and services. Transfer payments are not buying a good or service for the government and so are not included in government expenditures on goods and services.
- Net exports of goods and services , NX , is the value of exports of goods and services minus the value of imports of goods and services. Exports of goods and services are the items that firms in the United States produce and sell to the rest of the world.Imports of goods and services are the items that households, firms, and governments in the United States buy from the rest of the world. (1)
Total expenditure equals C + I + G + NX.
Self-Check Activity
Identify if the following goods and services are included in GDP. (1)
Multiple Choice Self Check
- The purchase of copy paper by Intel, which is used by the company staff.
- Included
- Not included
- The purchase of an electronic handheld organizer by a sales manager to keep track of clients.
- Included
- Not included
- The purchase of a new aircraft carrier by the Navy.
- Included
- Not included
- An increase in Dell’s inventory of unsold personal computers.
- Included
- Not included
- A family eating dinner at Taco Bell.
- Included
- Not included
- The salary of the President of the United States.
- Included
- Not included
- A Mom baking a birthday cake for her 8-year-old daughter.
- Included
- Not included
- The sale of a used computer.
- Included
- Not included
- Your donation of a used computer to a local elementary school.
- Included
- Not included
- The purchase by a German resident in Germany of an American-made ceiling fan produced in the United States.
- Included
- Not included
Expenditure Approach (Cont.)
The expenditure approach measures GDP as the sum of consumption expenditure, C , investment, I , government expenditures on goods and services, G , and net exports of goods and services, ( X – M ).
GPD = C + I + G + ( X âˆ’ M )
In the second quarter of 2011, annualized GDP in trillions of dollars was: $10.7 trillion + $1.9 trillion + $3.0 trillion + (-$0.6 trillion) = $15 trillion.
In the second quarter of 2013, annualized GDP in trillions of dollars was: $11.4 trillion + $2.6 trillion + $3.1 trillion + (-$0.5 trillion) = $16.7 trillion. (1)
Self-Check Activity
Carefully read each question below and write down your answer. (1)
Comparing 2011 with 2013, how do you think the U.S. is doing in terms of the GDP components?
[Consumption expenditure, Investment expenditure, Government expenditure and Net Exports have all increased from 2001 to 2013].
What do you think has happened with prices in general from 2011 to 2013?[Prices have a tendency to increase from year to year in the U.S., but exceptions exist and we will discuss them in Module 5 ].
What adjustments do you think we need to make to the above numbers for a better comparison of GDP from 2011 to 2013? [We need to remove the effect of prices increasing, by calculating RGDP and comparing RGDP numbers, as shown in the rest of this Module].