How is Gross Domestic Product (GDP) primarily calculated?

Gross Domestic Product (GDP) is primarily calculated by summing consumption, investment, government spending, and net exports. This approach is known as the expenditure approach, which is one of the most common methods for calculating GDP.

Consumption refers to the total spending by households on goods and services. This category includes everything from groceries to medical services. Investment captures spending on capital goods that will be used for future production, such as machinery and housing. Government spending includes expenditures on goods and services that government consumes for providing public services, and it excludes transfer payments such as pensions and unemployment benefits because these do not represent purchases of goods and services. Net exports are calculated as the difference between a country's exports and imports, which adjusts the GDP calculation for trade with other nations.

In contrast, measuring total imports and exports alone does not encompass the full economic activity represented in GDP. Calculating profits for major companies, while important for understanding business health, does not reflect the overall economic output of a nation. Assessing consumer sentiment provides insights into consumer confidence but does not directly measure economic activity. Thus, the comprehensive nature of the expenditure approach makes it the correct method for calculating GDP.