• GDP Calculation

    Expenditure approach is the most popular approach to calculate the GDP of a country. It calculates the total spending by the individuals (citizens) and Government to reach out the GDP figure. As per the expenditure method the GDP is calculated as

    GDP = Consumption (C) + Investment (I) + Government Spending (G) + 

                   Net Exports (X-M)

    The consumption and investment both denote the total spending by all the people living inside the country. The Net export denotes the difference between the export and import of all the goods and services.

    Consumption (C) is specified by the overall private and public household expenditure of a country and it is the largest GDP component. It includes all the consumption of durable goods, non-durable goods, foods, petrol/diesel, gas etc. and any medical, house hold, transport services by the whole citizens of the country.

    Investment (I) is specified by all the business and personal investments in new assets or any new product buy. For a business firm buying land, equipment, plant can be termed as an investment. For a household, buying a car, new house or some house hold electronics or electrical utilities/furniture can be termed as an investment.

    Cash deposits or buying bonds, mutual funds and stocks cannot be termed as investment to avoid double counting for GDP  as this money will be used by the business firms to buy lands and machines (already comes under Investment) or by the Government to spend more (comes under Government spending).

    Government Spending (G) is specified by total sum of government expenses on final goods and services. It includes the salaries of government employees, spending in defense and infrastructure sectors, providing subsidy to oil, agricultural, fertilizer and education sector. At the time of growth slowdown, Government spends more to lift the GDP and boost the economic activity.

    Exports (X) is denoted by the overall export of all the goods and services produced inside the country. It denotes all the goods and services a country produces for other foreign countries and exports the same. Suppose a country produces a car and exports the same to a foreign country, that car has to be included in the calculation of GDP.

    Imports (M) is denoted by the overall goods and services that a country imports to use from other foreign countries. As these are produced in the foreign countries and included in their GDP calculation, it has to be deducted while calculating GDP for the importing country.

    Also the imported products produced by other countries are included in Consumption and Investment category and must be deducted from the overall GDP to avoid miscalculation.

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