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What Is an Expenditure Method?

Jim B.
Jim B.

The expenditure method refers to the method of calculating a nation’s Gross Domestic Product, or GDP, by adding up all of the money spent by the country’s citizens and government. This is in contrast to the income method, which reverses the process somewhat and totals all earnings. Using the expenditure method requires adding up all consumer spending, governmental spending, capital investments, and net exports amassed by the country in the period of time being studied. Once this is done, adjustments can be made for inflation to calculate a country’s real GDP.

One of the main measurements designed to show a country’s economic growth, or lack thereof, is the Gross Domestic Product. It is meant to show the economic output of a country in a given time period. Comparing the GDP’s of several different countries is one way of showing how wealth is distributed among the nations of the world. In addition, studying the GDP of a specific country from year to year can effectively show economic trends within that country. Calculating the GDP of a country can be achieved by using the expenditure method.

Man climbing a rope
Man climbing a rope

An expenditure is an amount of money spent on something. It makes sense then that the expenditure method requires totaling up all spending. Such spending can come from the money spent by a household, also known as consumer spending. It also can come from the governing bodies in a country. Capital investments also go into this equation. The final part is the total of all net exports, which is calculated by subtracting the value of country’s imports from the value of its exports.

All these different expenditures yield a country’s Gross Domestic Product. Many economists prefer to factor inflation into the calculation of the GDP, arriving at a measurement called the real GDP. This is a more accurate representation of economic growth, since inflation affects the spending of citizens. If someone chooses to calculate the real GDP, it should be done only after the expenditure method has produced a preliminary total.

It is important to note that the expenditure method is not the only way to arrive at the Gross Domestic Product of a country. The income method, for example, totals all of the earnings from those companies and business that sell products to consumers, reversing the expenditure approach. Still, using expenditures requires a relatively easy bit of mathematics for the final calculation. This is the main reason that it is the most popular approach for calculating GDP.

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