EXPENDITURE METHOD

Expenditure method measures final expenditure on ‘Gross Domestic Product at market price’, dur-

ing a period of the year. Under this method, national income is measured at the point of actual ex-

penditure on goods and services for final use.

STEPS FOR ESTIMATING NATIONAL INCOME

1- identification of economic units incurring final expenditure

(a) household sector (b) producer sector (c) govt sector (d) rest of the world sector

2- classification of final expenditure

(a) private final consumption expenditure

- It measures the market value of goods and services purchased by households and non profit insti-

tutions serving households during an accounting year.

(b) Govt final consumption expenditure

- It is incurred by general govt to satisfy collective wants of the people such as govt expenditure on

health, education, law and order etc.

(c) Gross domestic capital function

- It includes gross domestic fixed capital formation and change in stocks

(d) Net exports

- It is the difference between value of exports and value of imports.

3- measurement of final expenditure

GDP MP = private final consumption expenditure+ govt final consumption expenditure+ gross do-

mestic capital formation+ net exports

4- calculation of domestic income

NDP FC=GDP MP - DEPRICIATION - NIT

5- calculation of national income

NNP FC = NDP FC + NFIA

* AN ALTERNATE APPROACH TO EXPENDITURE METHOD

- According to this method, gross domestic capital formation is calculated alternatively by measur-
ing it through investment expenditure.

Accordingly,

GDP MP = 1. Private final consumption expenditure +

 2. Govt. final consumption expenditure+

3. Investment expenditure + 4. Net exports.

INVESTMENT EXPENDITURE

Investment means additions to the existing stock of physical capital during a period of one year. As

investment goods are used up in the process of making other goods, capital goods get partially de-

pleted in producing other goods and services. This is called depreciation of fixed capital.

It is further classified into four categories:

- business fixed investment

- Inventory investment

- Residential construction investment

- Public investment

PRECAUTIONS FOR ESTIMATING NATIONAL INCOME

* The following items of expenditure should be included:

1- expenditure on final goods and services because it causes corresponding flow of goods and ser-

vices.

2- expenditure of commission on sale of second hand goods as a new service is being rendered.

3- expenditure on brokerage of shares and bonds, as it is the service being rendered by the broker.

4- imputed expenditure on own account production, as these are productive services.

* The following items are not included:

1- expenditure on intermediate goods and services in order to avoid double counting.

2- expenditure on transfer payments such as scholarships, old age pensions etc as no productive ser-

vice is rendered.
3- expenditure on purchase of second hand goods because there is no corresponding flow of goods.

4- expenditure on purchase of shares and bonds because these are paper claims which do not need

to corresponding flow of goods and services.

IMPORTANT FORMULAE

By expenditure method, we find

GDP MP= PFCE + GFCE + GDCF + NET EXPORTS

1- GDCF= GDFCF + CHANGE IN STOCKS

2- GDCF= NDCF + DEPRECIATION

3- GDCF= NDFCF + CHANGE IN STOCKS + DEPRECIATION

* ABBREVIATIONS USED

1- Private final consumption expenditure = PFCE

2- Govt final consumption expenditure = GFCE

3- Gross domestic capital formation = GDCF

4- Net domestic capital formation = NDCF

5- Gross domestic fixed capital formation = GDFCF

6- Net domestic fixed capital formation = NDFCF

7- Exports= X

8- Imports= M

EXAMPLES

Q-1) Determine GDP at market price from the information given below:
 S. No Particulars Rs. in Crores
1 Private consumption expenditure 15000
2 Govt consumption expenditure 11,500
3 Gross fixed capital information 1000
4 Increase in stocks 200
5 Exports 500
6 Imports 700
7 Capital consumption allowance 650
8 Net indirect taxes 500

Solution) GDP MP = private final consumption expenditure+ Govt consumption expenditure + Gross

fixed capital information + net Exports

= PFCE + GFCE + (GDFCF+ CHANGE IN STOCKS) + (X-M)

= 15000+11500+ (1000+200) + (500-700)

= Rs. 27500 crore

Q-2) Calculate National Income using expenditure method from following data:

S. No Particulars Rs in crores
1 Private final consumption expenditure in 1750
domestic values
2 Govt final consumption expenditure 100
3 Consumption of fixed capital 25
4 Net exports (-)25
5 Net factor income from abroad (-)20
6 Gross fixed capital formation 300
7 Change in stocks 50
8 Direct purchases abroad by resident 50
households
9 Direct purchases by non resident 100
households
10 Net indirect taxes 100

Solution)

GDP MP = PFCE + GFCE + GDCF + NET EXPORTS

= (1+4-9) + (2) + (6+7) +4

= (1750+50-100) +100 + (300+50)+(-25)

= RS. 2125 CRORES

NNP FC = GDP MP - DEP. + NFIA - NIT

= 2125-25+(-20)-100= 2125- 145 = RS. 1980 CRORES

Q-3) calculate net national product at market price:

 s. No Particulars Rs. in crores
1 Private final consumption expenditure 200

2 Net indirect tax 20

3 Change in tax (-)5
4 Net current transfers from abroad (-)10
5 Govt final consumption expenditure 50
6 Consumption of fixed capital 15
7 Net domestic capital formation 30
8 Net factor 5
9 Net imports 10
Solution)

1. GDP MP = private final consumption exp. + govt final consumption exp.+ gross domestic capital

formation+ net exports

GDP MP = private final consumption exp. + govt final consumption exp.+

(Net domestic capital formation + dep.) - net imports

= 200 + 50+ (30+15)-10= rs. 285 crores

2. NNP MP = GDP MP - DEP. + NFIA

= 285-15+5= rs. 275 crore

Q-4) From following information determine GDP MP with expenditure method:

S. No Particulars Rs in crores
1 Gross domestic fixed investment 1500
 2 Increase in inventories 1250
3 Govt consumption expenditure 1250
4 Exports of goods and services 850
5 Imports of goods and services 1050
6 Personal disposable income 11500
7 personal savings 1500
Solutions)

Personal disposable income = personal final exp.+personal savings

Hence private final consumption exp.=personal disposable income- personal savings

PFCE= 11500-1550= RS. 9950 CRORE

GDP MP = PFCE+GFCE+GDCF+NET EXPORTS

= PFCE+GFCE+ (GDFI+INC. IN INVENTORIES)+(X-M)

= 9950+1250+ (1500+1250)+(850-1050)

=9950+1250+2750-200

=RS. 13750 CRORES

Q-5) Calculate national income from the following data:

S. No Particulars Rs in crores
1 Private final consumption expenditure 900
2 Profit 100
 3 Govt final consumption expenditure 400
4 Net indirect taxes 100
5 Gross domestic Capital formation 250
6 change in stock 50
7 Net factor income from abroad (-)40
8 consumption in fixed Capital 20
9 Net imports 30
Solution)

1. GDP MP = 900+400+250-30

= RS 1520 CRORES

2. NNP FC = 1520-20+(-40)-100

=RS 1360 CRORES