The components of gross domestic product (GDP) include government spending, business investment, net exports of goods and services, and personal consumption expenditures. The latter is understood as one or several of the following categories: services, durable goods, and non-durable goods. As for disposable income, it is the amount of money left after taxes deduction, which reflects the overall state of the economy in a state. According to the expenditures approach, GDP can be calculated as the sum of investment, consumption, exports, and government purchases minus imports. In this case, government spending involves all expenditures except transfer payments made by a country. A set of goods and services bought by individuals composes the term of consumption. The business investment consists of two categories, such as a change in private inventory and fixed investment.
The key difference between expenditures and income approaches refers to their starting points: the former starts with spending on goods and services, and the latter begins with the income earned. The income approach to GDP implies adding the factors of income to the factors of production. This approach states that expenditures and income generated by a state should be equal as a result of generating services and goods. In this case, GDP is calculated as the sum of total national income, depreciation, sales taxes, and net foreign factor income. The total national income involves all profits, wages, interests, and rent, while net foreign factor income is defined as the difference between the total income generated by foreign citizens in the domestic country and the total income of a state’s citizens in foreign countries. Both expenditures and income approaches allow calculating a country’s GDP to create a wide picture of its economic position.