Expenditure Method of GDP

The expenditure method measures GDP by adding all final expenditure on goods and services produced within the domestic territory during an accounting period. The basic identity is GDP = C + I + G + (X - M), where each term captures a category of final demand.

Components of the identity

The identity measures GDP at market prices from the demand side of the economy.

• C is private final consumption expenditure by households and non-profit institutions serving households.
• I is gross domestic capital formation, covering fixed capital formation, changes in inventories and valuables; it is not the purchase of financial assets.
• G is government final consumption expenditure on goods and services.
• X - M is net exports: exports are added because they are domestically produced, while imports are subtracted because they are included in domestic expenditure but produced abroad.

Official expenditure-side presentation

In national accounts, the identity is presented through PFCE + GFCE + GFCF + changes in stocks + valuables + exports - imports. A statistical discrepancy may appear because expenditure-side aggregates and GDP estimated through other approaches are compiled from different data sources.

Why it is an identity

Production generates an equal amount of income and final expenditure in accounting terms. The expenditure method therefore avoids double counting by including only final goods and services, while capital formation is recorded on a gross basis because depreciation has not been deducted.