Measurement of N.I. (Expenditure Method)

Measurement of National Income
(Expenditure Method)
ANKIT KUMAR
PGT, ECONOMICS
❖ Expenditure method measures national income as some
total of final expenditures incurred by households,
business firms, government and foreigners.
❖ This total final expenditure is equal to gross domestic

product at market price.
❖ Expenditure method is also known as ‘Income Disposal

method’.
Components
of
Final Expenditure
Expenditure is undertaken by all sectors of an economy: households,
government, Firms and the foreign sector.
The various components of Final expenditure are:
1. Private Final consumption expenditure

2. Government final consumption expenditure
3. Gross domestic Capital formation
4. Net exports
Private Final Consumption Expenditure (PFCE)
❑ It refers to expenditure incurred by households and private

non-profit institutions serving households on all type of
consumer goods except houses.
❑ PFCE includes expenditure incurred by normal residents.
❑ Direct purchases made abroad by resident households are

added but direct purchases by non-resident households will
be deducted.
Government Final Consumption Expenditure (GFCE)
❖ It refers the expenditure incurred by general government

on various administrative services.
❖ GFCE is equal to cost of goods and services produced by

government for collective uses by the public.
❖ GFCE is also called Collective consumption or government

consumption.
Gross Domestic Capital Formation (GDCF) or Gross Investment
It refers to the addition to capital stock of the economy.
Investment can also be termed as Gross domestic capital

formation.
Investment expenditure is the expenditure incurred on

acquiring goods for investment by the production unit
located within the domestic territory.
Gross Domestic Capital Formation
Gross Fixed Inventory

Capital Formation Investment
Gross Business Gross Residential

Fixed Capital construction
Gross Public
Formation Investment Investment
Net Exports
❑ It refers to difference between exports and imports of a
country during a period of one year.
❑ The exported goods have been produced within the

country’s domestic territory. So, they are included in
output of an economy.
❑ Imports are deducted to obtain domestic product as they

are not produced within the domestic territory.
Steps of
Expenditure Method
Step – 1
Identify the economic Units incurring Final expenditure
All the economic units, which incur final expenditure within the
domestic territory, are classified under four groups.
1. Household sector
2. Government sector
3. Producing sector
4. Rest of the world
Step – 2
Classification of Final Expenditure
Final expenditure incurred by the above mentioned economic units are

estimated and classified under the following heads:
1. Private final consumption Expenditure (PFCE)
2. Government Final consumption expenditure (GFCE)
3. Gross domestic Capital formation (GDCF)
4. Net Exports (X – M)
Step – 3
Estimation of GDPMP
In this step we add up final expenditures on the goods and services.
According to expenditure method the sum total of four items
consumption, investment, government spending and net exports, is
the Final expenditure which gives us GDPMP.
GDPMP = C + I + G + ( X – M)
Step – 4
Estimation of National Income
Net factor income from Abroad is added, depreciation and net indirect
taxes are subtracted from GDPMP to arrive at National Income.
NNPFC = GDPMP – CFC + NFIA - NIT

Precautions
❑ Expenditure on Intermediate goods will not be included.
❑ Transfer Payments are not included.
❑ Purchase of second-hand goods will not be included.
❑ Purchase of financial assets will not be included.
❑ Expenditure on own account production will be included in the

national income.
Numerical Examples
Question- 1
Calculate GDP at Market Price.
Particulars ₹ in crores
Private Final Consumption Expenditure 1200

Government Final Consumption Expenditure 200
Gross Fixed Capital Formation 300
Change in Stock 400
Imports 500
Exports 600
Calculate GDP at Market Price.
GDPMP = PFCE + GFCE + GDCF + ( X – M )
GDCF = GFCF + Change in Stock
Private Final Consumption = 300 + 400 = 700 Crores
Expenditure 1200
Govt. Final Consumption GDPMP = 1200 + 200 + 700 + (600 – 500)
Expenditure 200
= 2100 + 100
Gross Fixed Capital
Formation 300 = 2200 Crores
Change in Stock 400
Imports 500
Exports 600
Question- 2
Calculate GDP at Factor Cost from the following data:

Net Domestic Capital Formation 150
Change in Stock 30
Net Factor Income from Abroad (-)20
Net Indirect tax 120
Net Exports (-)30
Consumption of fixed capital 50
Calculate GDP at Factor Cost
from the following data:
GDPMP = PFCE + GFCE + GDCF + ( X – M )
GDCF = NDCF + CFC
Private Final Consumption
Expenditure 800 = 150 + 50 = 200 Crores
Net Domestic Capital
Formation 150 GDPMP = 800 + 450 + 200 + ( - 30)
Change in Stock 30 = 1450 - 30 = 1420 Crores
Net Factor Income from
Abroad (-)20
GDPFC = GDPMP - NIT
Net Indirect tax 120
Govt. Final Consumption = 1420 - 120
Expenditure = 1300 Crores
450
Net Exports (-)30
Consumption of fixed
capital 50
Question- 3
Calculate Gross Fixed Capital Formation from the following data.

Net Exports (-)50
Net Factor Income from Abroad 20
Gross domestic Product at market price 2500
Opening Stock 300
Closing Stock 200
Calculate Gross Fixed Capital
Formation from the following GDPMP = PFCE + GFCE + GDCF + ( X – M )
data.
2500 = 1000 + 500 + GDCF + (- 50)
Particulars ₹ in crores 2500 = 1450 + GDCF
Private Final Consumption GDCF = 2500 - 1450 = 1050 Crores
Expenditure 1000
Govt. Final Consumption GDCF = GFCF + Change in stock
Expenditure
500 Change in stock = Closing stock - Opening stock
Net Exports (-)50 = 200 - 300 = (-)100 Crores
Net Factor Income from
Abroad 20 1050 = GFCF + (-100)
Gross domestic Product at
market price 2500 1050 = GFCF - 100
Opening Stock 300 GFCF = 1050 + 100 = 1150 Crores
Closing Stock 200
Question- 4
Calculate the value of depreciation from the following data.
Change in Stock 160

Net Domestic Capital Formation 1120
Gross Fixed Capital Formation 1190
GDCF = GFCF + Change in stock
Calculate the value of depreciation = 1190 + 160
from the following data.
= 1350 Crores
CFC = GDCF - NDCF
Change in Stock 160
Net Domestic Capital = 1350 - 1120
Formation 1120
= 230 Crores
Gross Fixed Capital
Formation 1190
Thank
You
ANKIT KUMAR
PGT, ECONOMICS

Measurement of N.I. (Expenditure Method)

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Measurement of N.I. (Expenditure Method)

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Measurement of National Income

❖ This total final expenditure is equal to gross domestic

❖ Expenditure method is also known as ‘Income Disposal

The various components of Final expenditure are:

1. Private Final consumption expenditure

❑ It refers to expenditure incurred by households and private

❑ PFCE includes expenditure incurred by normal residents.

❑ Direct purchases made abroad by resident households are

❖ It refers the expenditure incurred by general government

❖ GFCE is equal to cost of goods and services produced by

❖ GFCE is also called Collective consumption or government

It refers to the addition to capital stock of the economy.

Investment can also be termed as Gross domestic capital

Investment expenditure is the expenditure incurred on

Gross Fixed Inventory

Gross Business Gross Residential

❑ The exported goods have been produced within the

❑ Imports are deducted to obtain domestic product as they

Final expenditure incurred by the above mentioned economic units are

NNPFC = GDPMP – CFC + NFIA - NIT

❑ Transfer Payments are not included.

❑ Purchase of second-hand goods will not be included.

❑ Purchase of financial assets will not be included.

❑ Expenditure on own account production will be included in the

Private Final Consumption Expenditure 1200

Private Final Consumption Expenditure 800

Private Final Consumption Expenditure 1000

Change in Stock 160

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