What are the components of GDP using the expenditure approach?

The components of GDP using the expenditure approach are consumption, investment, government spending, and net exports.

The expenditure approach to calculating Gross Domestic Product (GDP) is based on the idea that all goods and services produced in an economy must be purchased by someone. Therefore, by adding up all the spending on goods and services, we can calculate the total value of a country's economic output. This approach is often summarised by the formula: GDP = C + I + G + (X - M), where C stands for consumption, I for investment, G for government spending, and (X - M) for net exports.

Consumption (C) is the total spending by households on goods and services. This does not include purchases of new housing, which are counted as an investment. Consumption is typically the largest component of GDP and can be broken down into three categories: durable goods, non-durable goods, and services.

Investment (I) includes business spending on physical capital, such as machinery and buildings, and changes in business inventories. It also includes residential investment, which is the purchase of new housing by households. Investment is a volatile component of GDP as it can be affected by interest rates and business confidence.

Government spending (G) is the sum of government expenditures on final goods and services. It includes spending on defence, education, public safety, infrastructure, and other public services. Transfer payments, such as social security or unemployment benefits, are not included as they do not represent a purchase of goods or services.

Net exports (X - M) represent the difference between what a country exports and what it imports. If a country exports more than it imports, net exports are positive, contributing to GDP. If a country imports more than it exports, net exports are negative, reducing GDP.

In summary, the expenditure approach to calculating GDP adds up all the spending on final goods and services in an economy. This includes consumption by households, investment by businesses, government spending, and the balance of exports and imports.