The expenditure approach
The added value generated by a firm’s output results from the purchase of the firm’s output
→ The GDP can also be measured by adding up all the expenditures pertaining to the purchase of an economy’s final output
National accounting identity present in almost all macroeconomic models : Y=C+I+G+X−M
Y = an economy’s total output, economy’s total expenditures, economy’s total income
C = Consumption, i.e. household’s purchases of final goods and services
I = Investment, i.e. firm’s purchases of new equipment goods > IMPORTANT : the stock variations are also accounted for in the “investment” category.
Volkswagen produces a car in November 2000, but only sells it in march 2001, for a total value of 7000 euros.> added value” approach : the car is included in the GDP measure for the year during which it was produced, i.e. 2000
“Income” approach : the remuneration of the production factors that were used for the production of this car will occur in 2000 “Expenditure” approach : the car was finally bought in 2001, meaning that its purchase will appear in the “C” category in 2001 ! → Compatibility problem between different GDP computation methods
⇒ Solution : explicitly account for stock variations ! (as mentioned above, included in category “I”). In 2000 : +7000 in the I category (stock increase). In 2001 : -7000 in the I category (stock decrease) and +7000 in the C category (private consumption expenditure)→ 7000-7000=0 : nullified operation in 2001
G= Government expenditures, i.e. the final goods and services purchased by the State.
Includes teachers’ payroll...
...but not the social transfers such as unemployment benefits !
X = eXports, i.e. the domestic final goods and services purchased by foreign economic agents
M = iMports, i.e. foreign final goods and services purchased by domestic economic agents
NX = X - M = Net eXports. More precisely, when a household/firm/government buys a foreign product, this purchase appears negatively in -M, but also positively in C, I or G → again, nullified operation