Expenditure Method for Measurement of National Income!

Factor income earned by factors of production is spent in the form of

expenditure on purchase of goods and services produced by firms.

ADVERTISEMENTS:

1. This method measures national income as sum total of final expenditures

incurred by households, business firms, government and foreigners.
2. This total final expenditure is equal to gross domestic product at market
price, i.e. Final Expenditure = GDPMP.
3. This method is also known as Income Disposal Method.

Components of Final Expenditure:

ADVERTISEMENTS:

Expenditure is undertaken by all the sectors of an economy: Households,

Government, Firms and the Foreign Sector.
The various components of final expenditure are:

1. Private Final Consumption Expenditure (PFCE):

ADVERTISEMENTS:

It refers to expenditure incurred by households and private non-profit

institutions serving households on all types of consumer goods, i.e. durable
(except houses), semi-durable, non-durable goods and services.

2. Government Final Consumption Expenditure (GFCE):

It refers to the expenditure incurred by general government on various
administrative services like defense, law and order, education etc.
Government produces goods and services with the aim of social welfare
without any intention of earning profits.

3. Gross Domestic Capital Formation (GDCF) or Gross

Investment:
It refers to the addition to capital stock of the economy. It represents the
expenditure incurred on acquiring goods for investment by the production
units located within the domestic territory.
There are two components of GDCF:
(i) Gross Fixed Capital Formation:
It refers to the expenditure incurred on purchase of fixed assets.

(ii) Inventory Investment (Change in Stock):

It refers to the physical change in the stock of raw material, semi-finished
goods and finished goods lying, with the producers. It is included as an
investment item because it represents the goods produced but not used for
current consumption. It is calculated as the difference between the closing
stock and the opening stock of the year.

4. Net Exports (X M):

It refers to the difference between exports and imports of a country during a
period of one year.
1. Exports (X) refer to expenditure by foreigners on purchase of domestic
products. The exported goods have been produced within the countrys
domestic territory So; they are included in output of an economy.
2. Imports (M) is the expenditure by residents on foreign products. Imports are
deducted to obtain domestic product as they are not produced within the
domestic territory.

Steps of Expenditure Method:

The steps involved in calculating National Income by Expenditure
Method are:
Step 1: Identify the Economic Units incurring Final Expenditure:
All the economic units, which incur final expenditure within the domestic
territory, are classified under 4 groups: lawyer (i) Household sector; (ii)
Government sector; (iii) Producing sector; (iv) Rest of the world sector.
Step 2: Classification of Final Expenditure:

Final expenditures 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).
The sum total of four components of final expenditure gives Gross Domestic
Product at Market Price (GDPMP), i.e. GDPMP = PFCE + GFCE + GDCF + (XM)
Step 3: Calculate Domestic Income (NDPFC)
By subtracting the amount of depreciation and net indirect taxes from GDPMP,
we get domestic income, i.e. NDPFC = GDPMP Depreciation Net Indirect
Taxes.
Step 4: Estimate net factor income from abroad (NFIA) to arrive at
National Income:
In the final step, NFIA is added to domestic income to arrive at National
Income.
National Income (NNPFC) = NDPFC+ NFIA