The National Income accounts are based on the idea that one persons spending is another person's income. This is expressed in a double-entry bookkeeping system of accounting. GDP can be measured either by total spending on U.S. production or by total income earned form that production. GDP Based on the Expenditure Approach The expenditure approach to GDP adds up the spending on all final goods and services produced in the economy during the year. The easiest way to understand the spending approach is to divide spending into its four components: consumption, investment, government purchases, and net exports. - Consumption consists of purchases of final goods and services by households during the year. Examples of services include dry cleaning, haircuts, and air travel. Consumption of goods includes non-durable goods and durable goods. - Investment consists of spending on new capital goods and additions to inventories. More generally, Investment consists of spending on currents production that is not used for current consumption. the most important category of investment is new physical capital, such as new buildings and new machinery purchased by firms and used to produce goods and services. - Government Purchases include spending by all levels of government for goods and services-- from clearing snowy roads to clearing court dockets, from library books to the librarian's pay. Government purchases at all levels average 18 percent of U.S. GDP during the last decade. - Net exports result from the interaction between U.S. residents and the rest of the world. To figure out the net effect of the rest of the world on GDP, the value of imports must be subtracted from the value of imports. Net Exports equal the value of U.S. exports of goods and services minus the value of U.S. imports of goods and services. -Aggregate expenditure it the total spending on all final goods and services produced int he economy during the year. Aggregate also means total. GDP based on the Income Approach - Income approach to GDP adds up the aggregate income earned during the year by those who produce that output. -Aggregate income equals the sum of all the income earned by resource suppliers in the economy Thus Aggregate expenditure equals GDP and Aggregate income. - the value added by each firm equals that firm's revenue minus the amount paid for intermediate goods, This is the amount spent on inputs purchased from other firms.