GDP can be calculated using the expenditure approach, which is based on the spending amount in the country.
Explanation:
The country’s GDP (general domestic product) features many economic indexes and provides information on the level of the country’s economy. There are several ways to calculate the country’s GDP, and the expenditure approach is the most common one. The expenditure approach to GDP relies on the amounts spent on goods and services, calculating spending throughout the national economy. There is an expenditure approach formula, which is: GDP = C + I + G + NX. In this formula, ‘C’ stands for consumer spending, represented by certain individuals or households investing money in services or goods for personal use like buying a house or ordering food. ‘I’ means investments, including money spent by businesses or investors on capital goods for companies. Here, investments only refer to different forms of capital, and it does not include paper assets or real assets. An example of such investment is a U. S. car production company buying a new factory in the United States. ‘G’ implies government spending on infrastructure or public goods and services, for instance, building a new shopping center. ‘NX’ stands for net export, which equals the country’s export minus import amount. Positive net export can be a result of a foreign company buying machinery produced in the U. S.
An alternative way of measuring GDP is the income approach, which focuses on the earnings of the households, assuming that the income should equal all expenditures. Its formula is TNI (Total national income) = Sales Taxes + Depreciation + NFFI (Net foreign factor income). The expenditure approach incorporates fewer variables and starts at a different point, but both models should result in the same GDP amount, even though based on different measurement factors. Both the income approach example and expenditure approach example can be seen in the table:
It is clear from this table that both models require different sets of data in order to measure GDP, but the outcome is the same.