EXPENDITURE METHOD FOR MEASURING NATIONAL INCOME

Expenditure method is the method which measures the final expenditure on gross domestic product at market price during an accounting year. This total final expenditure is equal to the gross domestic product at market price.

                     STEP I- Identification of Economic Units Incurring Final Expenditure

All the economic units which incur final expenditure in the domestic territory of a country are broadly classified into following groups:

-          Household Sector

-          Producer Sector

-          Government Sector

-          Rest of the World Sector

                     STEP II- Classification of Final Expenditure

                                                STEP III- Measurement of Final Expenditure

This step involves the measurement of the components of final expenditure.

I)                    Final Consumption Expenditure- There are two types of components in final consumption expenditure- Private and Government Final Consumption Expenditure

1)      Private Final Consumption Expenditure- To measure private final consumption expenditure-

- The volume of final sale of the durable goods, semi-durable goods, non-durable goods and services to the consumer household and non-profit institutions serving households is multiplied by retail prices.

-The direct purchases of non-resident households in the domestic market are deducted from it.

- The direct purchases of resident household made abroad are added.

2)      Government Final Consumption Expenditure- To measure government final consumption expenditure-

-The total volume of sales to the government by the enterprises is multiplied by retail prices.

-Compensation of employees and purchases from abroad is added to it.

II)                   Final Investment Expenditure- There components involved in final  

                      investment expenditure are-         

                       

1)      Expenditure on Construction- To measure expenditure on construction, the volume of material inputs like steel, cement, bricks and labour is multiplied by the price paid by the builder.

2)      Expenditure on Machinery- The expenditure on machinery and equipment can be calculated in two ways.

-The volume of their final sales is multiplied by the retail prices prevailing in the market

-The volume of machinery and equipment produced in the current year is found and multiplied by the price paid by the purchaser.

                3)    Expenditure on Change in stock-The change in the stock is measured by 

                      multiplying the volume of physical change with the market price of the stock.

                4)   Net Exports- The value of net exports (Exports-Imports) is calculated.

Gross Domestic Product at market price is calculated by Expenditure method.

 GDP (Gross Domestic Product) at Market Price = Private Final Consumption expenditure + Government Final Consumption Expenditure + Gross Fixed Capital Formation+ Change in Stock +Net Exports

GNP (Gross National Product) at Market price = GDP at Market Price + Net Factor Income from Abroad

NNP (Net National Product) at Market Price = GNP at Market Price – Depreciation

NNP (Net National Product) at Factor Cost = NNP at Market Price – Net Indirect Tax

Precautions Regarding Expenditure Method

Items Included in Expenditure Method	Items Excluded in Expenditure Method
Only Final expenditure is included to avoid double counting	Intermediate goods
	Expenditure on second hand goods
	Expenditure on Shares and bonds
	Government expenditure on transfer payments such as old age pensions, scholarships etc.