How does the expenditure approach calculate GDP?
A. It adds up all the incomes in the economy.
B. It adds up the value of four groups of final goods and services.
C. It adds up the value of business goods and services.
D. It adds up the value of consumer goods and services.
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The correct answer is B. The expenditure approach calculates GDP by adding up the value of four groups of final goods and services. These four groups are:
1. Consumption Expenditure: This includes all the spending by households on goods and services, such as food, clothing, and transportation.
2. Investment Expenditure: This includes spending by businesses on capital goods, such as machinery and equipment, as well as spending on new residential construction.
3. Government Expenditure: This includes all the spending by government entities on goods and services, such as defense, education, and healthcare.
4. Net Exports: This is the value of exports minus the value of imports. It represents the difference between what a country sells to other countries (exports) and what it buys from other countries (imports).
By adding up the value of these four groups of final goods and services, we can calculate the total value of goods and services produced within an economy, which is known as Gross Domestic Product (GDP).