Skip to main content

Expenditure Method of Measuring National Income

In the expenditure method, national income is estimated by adding up the expenditure incurred on the purchase of final goods and services by the various sectors of the economy in an accounting year. The main expenditure done in an economy is either on consumption or investment. Hence, the expenditure done in an economy is divided into consumption expenditure and investment expenditure. 

The sectors of the economy which incur expenditure are the households, firms, government and external sector and their respective expenditures are Consumption expenditure, Investment expenditure, Government expenditure and expenditure on exports and imports.

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

The income generated in the economy falls into one of these four categories.This equation also represents an identity as the equation always holds because the variables are defined in such a way. Lets study each component individually

1. Consumption Expenditure (C): 

Includes the expenditure done by households on the purchase of final goods and services. Goods are can be durable (which last for a long period of time such as cars, refrigerators etc) or non-durable (which last for a short period of time like milk, fruits etc). Services include various intangible services like teaching, I.T, banking etc). The consumption expenditure of private non-profit institutions is also included. Consumption expenditure is also known as private final consumption expenditure. Expenditure on construction of houses or residential property is not included in consumption, it is included in investment.

2. Investment Expenditure (I): 

It includes expenditure on such goods which help in the production of more goods and services or which are helpful in adding to the productive capacity of the nation. 

Investment can be broadly of two types 

1)Fixed Investment and,

2)Inventory Investment. 

Fixed investment refers to investment on fixed assets like equipment, plant and machinery It can be further classified into 

a)Business Fixed Investment, 

b)Residential Fixed Investment or Fixed Investment by households on construction of houses. 

In addition fixed investment is also done by the government in terms of expenditure on building roads, highways, dams etc. 

Inventory investment refers to the stock of firms good which are not sold.

3. Government Expenditure (G): 

Apart from households even government has to incur expenditure on the purchase of goods and services for its functioning. These can be expenditure on defense equipment’s, purchase of office supplies, expenditure on services of government employees. Transfer payments such as scholarships, unemployment allowance are not included in this expenditure as these transfer payments are not done in exchange of/ accompanied by the production of goods and services.

4. Net Exports (X (exports)-M(imports)):

Nations trade goods and service among themselves. Goods and Services which are sold to other nations are called exports whereas goods and service bought from other nations form imports. Exports lead to earning of money and imports mean losing of money. The net of exports are included in the estimation on national income. Net exports refer to the value of exports minus the value of imports. Negative and positive.

The sum of these four expenditures gives us the total expenditure in an economy in a given year which is equal to GDPMP

GDPMP = Private Final Consumption Expenditure + Business Fixed Investment + Residential Fixed Investment by Households + Government Fixed Investment + Government Final Consumption Expenditure + Net Exports (Exports - Imports)

The NNPFC can then be derived by subtracting depreciation and adding Net Factor Income from Abroad 






Labels:

Popular Posts

Understanding Trade-Offs in Economics: Balancing Choices for Optimal Outcomes

  TRADE-OFFS  Economics is concerned with people making decisions. However, these decisions are not always easy to make as making a decision involves making a choice. This choice may be between different alternatives/goals/options. Generally, choosing one goal means not being able to choose the other one. This results in what we call a trade-off where in order to choose one thing we have to let go or sacrifice the other one. Examples of Trade-Offs:  P eople face numerous trade-offs in their daily lives. Let’s say a person wants to reach his office. He may either go by car or bicycle. Going by a bicycle is not only environmentally friendly but also is a good exercise. However, going by a car will save time and make him reach faster. This is a situation of trade-off where the person has to choose an option and in choosing one, he will be giving up the other one. A family which has a limited monthly budget has to decide whether to spend that money on a vacation, saving for their chil
Read more

What are Consumer Goods, Capital Goods and Intermediate Goods? With Examples

  Consumer Goods, Capital Goods, Intermediate Goods After the production of a good or service, the next aim of the producer is to sell the good to the consumer. The consumer can be an individual or a firm; and the good when sold to the consumer can be consumed as it is or the good can be transformed into another good with the help of a productive process such as a machine.  For example, when wheat is sold to a flour mill, it is converted into flour through the use of machinery. When a good is transformed into another good like in the case of wheat, it loses its specific characteristic during the production process.   Such type of a good is known as intermediate good. When the goods are not further transformed into other goods, and are used as it is, it is known as final goods. So, the final goods are those which do not pass through any further production process or transformation and are used as it is by the consumers. The final goods can be of two types- Consumer goods and Capital
Read more

Consumer's Equilibrium using Marginal Utility Analysis

The Law of Diminishing Marginal Utility It has been observed that the desire to consume a commodity decreases as more and more units of that commodity are consumed. Therefore, every successive unit of the commodity consumed provides lesser utility than before. The Law of Diminishing Marginal Utility states that as more and more units of a commodity are consumed, the Marginal Utility derived from every successive unit of the commodity declines.  This happens because psychologically, as a consumer starts to consume one unit of the good after another, the the consumers satisfaction reaches a saturation point. So, with every successive unit consumed, the additional utility the consumer derives goes on declining.  Consumer's Equilibrium using Marginal Utility: Cardinal Analysis Consumer's equilibrium is that level of consumption at which the consumer is getting maximum satisfaction (benefit) while spending out of his given income across different goods and services, and has no tende
Read more