Expenditure Method for Measuring National Income: Method, Steps and Precaution

Expenditure Method for Measuring National Income: Method, Steps and Precaution!

(a) Method:

Expenditure method measures final expenditure on ‘Gross Domestic Product at market price (GDP at MP) during a period of account.

Since all domestically produced goods and services are purchased for final use either by consumers for consumption or by producers for investment, therefore, we take sum of final expenditure on consumption and investment. This sum equals GDP at MP. Final expenditure is the expenditure made on purchase of domestically produced goods and services for final use, i.e., for consumption and investment.

Under expenditure method national income is calculated first by adding up all the items of final consumption expenditure and final investment expenditure within the domestic economy The resulting total is called GDP at MR By subtracting depreciation and net indirect taxes from GDP at MP and adding to its net factor income from abroad, we get NNP at FC or national income. Thus, under expenditure method, national income is measured at the point of actual expenditure.

Mind, income generated by factors of production in the production process is spent by them on final goods. Final use of a commodity is either for consumption or for investment and expenditure on them is called Final Consumption Expenditure and Final Investment Expenditure, respectively By adding up all the items of final consumption expenditure and final investment expenditure within the domestic economy, we get the aggregate called GDP at MP

(b) Steps involved:

Expenditure method involves the following steps:

(i) Identification of economic units incurring final expenditure, e.g., household (or consuming) sector, firm (or producing) sector and government sector.

(ii) Classification of final aggregate expenditure into following components:

1. Private final consumption expenditure.

2. Government final consumption expenditure.

3. Gross fixed capital formation.

4. Change in stocks.

5. Net exports.

(iii) Measurement final expenditure on the above components. Sum total of the above five items gives us the value of GDP at ME By deducting depreciation and net indirect taxes from GDP at MP we get NDP at FC.

(iv) Estimation of net factor income from abroad which is added to NDP at FC (Domestic Income) to obtain NNP at FC (National Income).

(c) Precautions:

The following precautions need to be taken for correct estimation of national Income by expenditure method.

Alternatively, following items of expenditure should not be included:

(i) To avoid double counting, expenditure on all intermediate goods and services is excluded. For example, purchase of vegetables by a restaurant, expenses on electricity by a factory, etc., are not included as they are for intermediate consumption.

(ii) Government expenditure on all transfer payments such as scholarships, unemployment allowance, old-age pension, etc. is excluded because no productive service is rendered by the recipients in exchange.

(iii) Expenditure on purchase of second-hand goods is excluded from national income because this type of expenditure is not on currently produced goods.

(iv) Expenditure on purchase of old shares/bonds or new shares/bonds, etc. is excluded because it is not payment for goods or services currently produced. It shows mere transfer of property from one person to another. Likewise, gifts from abroad which bring transfer payment are not included.

(v) Imputed expenditure on own account output (e.g., owner occupying his house, self- consumed output by a farmer) should be included.