There are different ways of calculating gross domestic product (GDP), which is the total of all final goods produced in a country within a specific time frame and is used for economic reporting purposes. One way is by the expenditure approach, which simply totals the expenditures on goods and services produced during the year. This method includes four components.
1. Consumption purchases. Personal consumption is the household spending on goods and services during the current period. Most of these expenditures include nondurable things such as food, clothing, recreation, fuel, and medical expenses. However, durable goods, such as appliances and automobiles are included as well. Yet, because these goods last a longer period of time than nondurable goods do, they are counted but only in the period they are purchased. These consumption purchases make up the largest component of GDP.
2. Gross private investment. Private investment is the production of capital goods that provide a flow of future service. Private investment includes the actual invested durable assets and the increase in business inventories as well. Investment contributes to the ability to produce goods in the future for benefit. Gross investment includes expenditures for the replacement of worn out equipment as well as net additions to stock. Of course, depreciation on how used an item is and inventory investment or unsold goods must be taken into account also.
3. Government consumption and gross investment. Government spending is also calculated towards GDP. Spending on things such as law enforcement, office supplies, operation of veterans’ hospitals, highways, damns, and missiles are examples of government expenditures. However, it is important to remember that government purchases are counted at their cost to taxpayers rather than their value to who receives them.
4. Net Exports. Net exports are equal to exports, goods sold to other countries, minus imports, goods bought from other countries. It can also be said that we must add exports and subtract imports, but this is simplified into one step through net exports. Net exports may be either positive or negative. Net exports are positive when more is exported or sold than is imported or bought or vice versa.
When calculating GDP through the expenditure approach, there are four things that must be factored into calculation. They are consumption purchases, gross private investment, government consumption and gross investment, and net exports. All of these added together will equal gross domestic product.