To calculate gross domestic product (GDP) with the expenditures approach, add up the sums of all consumer spending, government spending, business investment spending and net exports. The resulting GDP figures, also known as aggregate demand, should represent the total amount of expenditure on final goods and services over a set period of time.
The National Income Accounting Identity
There are several ways to measure total output in an economy. Standard Keynesian macroeconomics theory has two such methods: the income approach and the expenditures approach to GDP. Of the two, the expenditures approach is cited far more often.
In 1991, the United States officially switched from gross national product (GNP) to GDP. GNP attempted to track the value of goods and services produced by all citizens of the U.S., regardless of physical location. The switch to GDP changed it to an account of the value of all goods and services produced within the physical borders of the United States, regardless of national origin.
The Expenditures Approach
Expenditures is a reference to spending; Keynesian theory places extreme macroeconomic importance on the willingness for businesses, individuals and governments to spend money. 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 exactly the same as the formula for calculating aggregate demand: Y = C + I + G + NX
According to this approach, all output must go toward one of four sources: private individual consumers (C), business (I), governments (G) or foreigners (net exports, or NX).
The expenditure approach is different than the income approach, which instead focuses on the income received by the factors of production: labor, capital, land and entrepreneurs. (For related reading, see: The GDP and Its Importance.)