__The Expenditure Approach__The expenditure approach states that we use the following formula to calculate GDP:

Where:

**C = Consumption Expenditure:**the total payment of goods and services paid by U.S. households.

(Note: This does not include the purchase of new homes)

**I = Investment:**the total amount of money spent on capital equipment and building, and including business inventories.

**G = Government Expenditure:**the total payment of goods and services paid by the government, such as national defense.

**X = Exports on Goods:**the values of exports that are exported to the rest of the world.

**M = Imports on Goods:**the values of imports that are imported from the rest of the world.

__The Income Approach__The income approach states that we can calculate GDP by using the following formula

Where:

**W = Wages:**the total amount that is compensated to employees for their work.

**R = Rent Income:**payment for the use of land or other rented resources

**I = (Net) Interest:**the interest households receive on loans they made subtracted by the interest households pay on their own borrowing.

**P = Profit:**profits of corporations, which some are distributed to households in the form of dividends.

**SA= Statistical Adjustments:**There are 3 types.

- Depreciation: the decrease in fixed capital over time
- Indirect Tax: This is the sales tax
- Net foreign factor income: income that foreigners earn in the US minus the income Americans earn from other countries)

Note: When calculating the GDP through both approaches, you will see that they won’t equal. The difference between the expenditure approach GDP and income approach GDP is called the

**statistical discrepancy**.

Note 2: Net Operating Surplus is sum of Rent, Interest, and Profit.

__Nominal and Real GDP__**Nominal GDP:**The value of finished goods and services in a specific year are valued at the current market price.

Suppose there are goods $x$ and $y$, and the current year is 2018.

To calculate nominal GDP, we use the following formula:

Where:

$P_{x, \, 2018} \,$→$\,$ price of good $x$ in the year 2018.

$Q_{x} \,$→$\,$ quantity of good $x$

$P_{y, \, 2018} \,$→$\,$ price of good $y$ in the year 2018.

$Q_{y} \,$→$\,$ quantity of good $y$

**Real GDP:**The value of finished goods and services in a specific year are valued at the price of a base year.

Suppose there are goods $x$ and $y$. The current year is 2018, and the base year is 2017.

To calculate Real GDP in the year 2018, we use the following formula:

Where:

$P_{x, \,2017} \,$→$\, \$ price of good $x$ in the year 2017.

$Q_{x, \, 2018} \,$→$\,$ quantity of good $x$ in the current year 2018.

$P_{y, \,2017} \,$→$\, \$ price of good $y$ in the year 2017.

$Q_{y, \, 2018} \,$→$\,$ quantity of good $y$ in the current year 2018.