Calculating GDP: Expenditure, Income, and Value-Added Approaches

Expenditure approach

Calculates GDP by adding total spending on final goods and services.

Income approach

Calculates GDP by adding all income earned by the factors of production.

Value-added approach

Calculates GDP by adding the value each producer adds to a product at each stage of production.

Value added

A firm's sales minus the cost of intermediate goods it purchased.

Consumer spending (C)

Spending by households on goods and services.

Investment spending (I)

Spending by firms on physical capital and changes in inventory.

Government purchases (G)

Government spending on goods and services.

Exports (X)

Goods and services produced domestically and sold to other countries.

Imports (M)

Goods and services purchased from other countries.

Net exports

The value of exports minus the value of imports.

GDP formula

GDP = C + I + G + (X − M)

Wages

Income earned by labor.

Interest

Income earned by people who lend their savings to firms and the government.

Rent

Income earned by owners who lease their land or structures to firms.

Profit

Income earned by owners of firms' physical capital after wages, interest, and rent are paid.

Circular Flow

The continuous flow of income, spending, resources, and goods/services between households and firms.

What do households provide?

Factors of production, especially labor.

What do firms provide?

Goods and services.

What do households receive from firms?

Income/wages for providing factors of production.

What do households do with their income?

Spend it on goods and services in the product market.

What happens to money when households buy goods?

It flows back to firms as revenue.

Product market

The market where goods and services are bought and sold.

Factor market

The market where factors of production (labor, land, capital, and entrepreneurship) are bought and sold.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country during a given period of time.

Final goods and services

Goods and services sold to the final user and not used as inputs to make another product.

Intermediate goods and services

Goods and services used as inputs in the production of final goods and services.