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Expenditure method

This is also called the income disposal method or consumption and investment method. This method measures the final expenditure on Gross Domestic Product at market price during an accounting year. National income is the aggregate of all final expenditure in an economy during the year.
National income (Y) = Final consumption expenditure (C) + Final investment expenditure or capital formation (I)
This method involves the following steps:

Step 1: Identification of economic units incurring final expenditure

There are 3 categories of economic units which incur final expenditure within the domestic territory of a country:
  • Household sector
  • Producing sector
  • Government sector

Step 2: Classification of final expenditure

Final consumption expenditure: It comprises of the following:
  • Private final consumption expenditure: To measure this, the volume of final sales of durable, semi-durable and non-durable goods and services to the consumers, households and non-profit institutions serving households are added to retail prices. Direct purchases of non-resident households in the domestic market are not accounted and direct purchases of normal resident households made abroad are added.
  • General Government final consumption expenditure: It is estimated as the total expenditure incurred by the Government for producing various services to satisfy collective needs. The value of Government final consumption expenditure is the sum total of:
    • …Compensation to employees paid by the Government
    • …Goods and services purchased by the Government from domestic market
    • …Purchases from abroad
  • Gross domestic capital formation: This includes:
    Gross domestic fixed capital formation: It involves the estimation of:
    • …Expenditure on consumption: This is also called commodity flow approach. To measure the expenditure on construction, the volume of material inputs like steel, cement etc. is multiplied by the price paid by the builders.
    • …Final expenditure on machinery and equipment: This is estimated either by the volume of their final sales which is multiplied by the retail prices prevailing in the market or the volume of machinery and equipment produced in the current year multiplied by the prices paid by the purchasers. The expenditure on change in stock: This is measured by multiplying the volume of physical change in stock with the market prices of the stock.
    • Change in stock = Closing stock – Opening stock
  • Expenditure on the acquisition of valuables: Valuables may be defined as those goods which are of high value and are acquired for the store of value. They are not used for consumption.
  • Net exports: It is the difference between exports and imports of a country during one year. It may be positive or negative.
    • …Net exports = Exports – Imports
    • …Net foreign investment = Net exports + NFIA
    • …Final consumption expenditure = Private final consumption expenditure + General government final consumption expenditure
    • …Final consumption expenditure + Gross domestic capital formation + Net exports = GDPMP
    • …GNPMP – Net indirect taxes = GNPFC
    • …GNPFC – Depreciation = NNPFC or national income
The contributions of different sectors to the total national income are estimated by different methods. Thus, in agricultural sector, net value added is estimated by the production method. In the small scale sector, net value added is estimated by the income method and in construction sector, net value added is estimated by the expenditure method.


Note: Income method may be most suitable for developed economies where people file their income tax returns properly.

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