Why subtract imports when measuring GDP

The total spending by residents within a country, on either domestic or imported goods and services, is defined as:

\text{Domestic expenditure} = C + I + G,

where C is consumption of domestic and imported goods and services by domestic residents, I is the amount of investment and G is government spending.

This implies that the total spending by residents within a country only on domestically produced goods and services is:

\text{Domestic expenditure on domestic production} = C + I + G - M,

where M is the spending on imports. As goods can also be exported, for the total spending on domestically produced goods and services produced within a country, we need to add exports (X) such that:

\text{Total expenditure on domestic production} = C + I + G - M + X

Since GDP is defined as the market value of domestic production, we have

 GDP = \text{Total expenditure on domestic production}

Therefore,

GDP = C + I + G - M + X

Which often is re-arranged such that:

GDP = C + I + G + (X - M),

as (X - M) represents net exports.