Canadian Securities Course (CSC) Level 1 Practice Exam

Describe the Expenditure approach.

1. Calculates an industry's output and subtracts the value of all goods and services used to produce the outputs.

2. Adds up all of the income generated by economic activity.

3. Adds up everything that consumers, businesses, and governments spend during a time frame.

4. Total spending on goods and services should equal the total income generated by producing those goods and services.

The correct answer is: Adds up everything that consumers, businesses, and governments spend during a time frame.

The correct choice emphasizes the central premise of the Expenditure approach to measuring economic activity, which fundamentally revolves around the total spending by different sectors of the economy. By adding up all expenditures made by consumers, businesses, and governments, this approach provides a comprehensive picture of economic health. This measurement includes consumer spending on goods and services, business investments, government expenditures, and net exports (exports minus imports). This approach is significant because it directly correlates to the overall demand within an economy. When consumers, businesses, and governments increase their spending, it can lead to higher production, more jobs, and ultimately, economic growth. This makes the Expenditure approach a critical tool for economists and policymakers when assessing the state and trajectory of an economy. While other approaches may focus on outputs or income generation, the Expenditure approach is unique in its direct attention to spending flow, making it a foundational concept in understanding economic dynamics.