Explain why you get the same figure of National Income irrespective of the approach
used (i.e. output, income and expenditure approaches).
Answers
Explanation:
he expenditure method is a system for calculating gross domestic product (GDP) that combines consumption, investment, government spending and net exports. It is the most common way to estimate GDP, and it says everything that the private sector, including consumers and private firms, and government spend within the borders of a particular country, must add up to the total value of all finished goods and services produced over a certain period of time. This method produces nominal GDP, which must then be adjusted for inflation to result in the real GDP.
The expenditure method may be contrasted with the income approach for calculated GDP.
How the Expenditure Method Works
Expenditure is a reference to spending. Another word for spending is demand. The total spending, or demand, in the economy is known as aggregate demand. This is why the GDP formula is actually the same as the formula for calculating aggregate demand. Because of this, aggregate demand and expenditure GDP must fall or rise in tandem.
However, this similarity isn't technically always present in the real world—especially when looking at GDP over the long run. Short-run aggregate demand only measures total output for a single nominal price level, or the average of current prices across the entire spectrum of goods and services produced in the economy. Aggregate demand only equals GDP in the long run after adjusting for price level.
The expenditure method is the most widely used approach for estimating GDP, which is a measure of the economy's output produced within a country's borders irrespective of who owns the means to production. The GDP under this method is calculated by summing up all of the expenditures made on final goods and services. There are four main aggregate expenditures that go into calculating GDP: consumption by households, investment by businesses, government spending on goods and services, and net exports, which are equal to exports minus imports of goods and services.
The Formula for Expenditure GDP is:
\begin{aligned} &GDP = C + I + G + (X - M)\\ &\textbf{where:}\\ &C = \text{Consumer spending on goods and services}\\ &I = \text{Investor spending on business capital goods}\\ &G = \text{Government spending on public goods and services}\\ &X = \text{exports}\\ &M = \text{imports}\\ \end{aligned}
GDP=C+I+G+(X−M)
where:
C=Consumer spending on goods and services
I=Investor spending on business capital goods
G=Government spending on public goods and services
X=exports
M=imports