Expenditure Method - Explained
What is the Expenditure Method?
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Table of ContentsWhat 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.
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.