Which of the following best represents the GDP formula?

• A. GDP equals the sum of consumer spending, government spending, and investment
• B. GDP equals consumer spending plus government spending plus investment plus exports minus imports
• C. GDP excludes depreciation
• D. GDP equals the total income generated domestically

Answer: (B)

GDP, from the expenditure side, is the total spending on domestically produced final goods and services. It adds up consumer spending (C), business investment (I), government purchases (G), and net exports (exports minus imports, NX). The reason net exports appear is that spending on imports is on goods made abroad, so it doesn’t add to domestic production, while exports are produced domestically and do increase domestic output. Put together, the formula is GDP = C + I + G + (Exports − Imports).

Depreciation is tied to a different measure: net domestic product (NDP) = GDP − depreciation. So GDP is the gross measure of production, not reduced by depreciation. While GDP can also be represented via the income approach, the standard “best-fit” formula in this context is the expenditure one that includes net exports.