The expenditure formula is a way to calculate the Gross Domestic Product (GDP) by adding up the total spending in an economy. It includes consumption (C), investment (I), government spending (G), and net exports (Xn).
Think of the expenditure formula as a recipe for calculating GDP. Just like a recipe combines different ingredients to make a delicious dish, the expenditure formula combines different components of spending to measure the overall economic activity.
Consumption (C): This refers to the total spending by households on goods and services.
Investment (I): It represents the spending by businesses on capital goods, such as machinery and equipment, which are used for production.
Government Spending (G): This term refers to the expenditures made by the government on public goods and services, such as infrastructure projects or defense.
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