Expenditures Approach to Calculating GDP
In this approach GDP is calculated as the sum of four categories of expenditures on output. These are:
Gross Private Consumption Expenditures(C)
Private Consumption Expenditures (C):
This is the largest category and accounts for about two-thirds of the GDP
Total Investment (I) = Fixed Investment + Inventory Investment + Residential Investment
Eventually all capital begins to wear out because of use or may even become technologically obsolete. This process is called depreciation which is the decrease in the capital's value. Net private investment is gross private investment minus depreciation. Net private investment is important because it gives economists a clue to a possible increase to a certain capacity that a country can produce.
Government Purchases (G):
This accounts for the total expenditures on new goods and services by the local, state, and federal government. Transfer payments are not included in government purchases, but rather find their way to consumption or investment. These payments include the spending of the government on welfare projects. These are programs and benefits that are awarded to individuals who do not need to work for it.
Net Exports (NX = X - M):
The value of a country's total exports minus its total imports
GDP and NDP
Net Domestic Product (NDP) is GDP minus depreciation. Since depreciation is sometimes hard to account for, GDP is often used when calculating national income.
NDP = GDP - total capital depreciation