Methods of calculating national income - Expenditure Method

Net exports measure the difference between a country’s exports and imports. The formula is NX = X − M, where X represents exports and M represents imports. Substituting the given values gives NX = ₹300 − ₹240 = ₹60. Therefore, the country has positive net exports of ₹60, meaning exports exceed imports by ₹60. ₹540 is their total, not their difference.

An old-age pension is a transfer payment: the recipient receives income without supplying a currently produced good or service in return. The payment itself is therefore excluded from GDP expenditure. A new bicycle is consumption, a new machine is investment, and exports are included because they represent current domestic production sold abroad.

In the expenditure method, domestic product is measured by adding expenditure on final goods and services produced within the domestic territory. Spending on imports may be made by households, firms, or the government, but the imported goods were produced in another country. Therefore, imports are deducted from total expenditure so that foreign production is excluded and only domestic production is counted. This is why the expenditure identity includes exports minus imports as net exports.

Exports are goods and services produced within the domestic territory but purchased by residents of other countries. Their production creates domestic income and output, even though the expenditure is made by foreigners. Therefore, exports are added to domestic expenditure in the expenditure method. In the national income identity, exports are combined with imports as net exports: exports minus imports. This ensures that domestic production sold abroad is included.

Intermediate goods are purchased for further production or resale rather than for final use. Their value is transferred to, and included in, the price of the final goods and services produced later. If the expenditure on intermediate goods were added separately along with expenditure on final goods, the same output value would be counted more than once. The expenditure method therefore counts final expenditure only, preventing double counting.

Schooling is an educational service purchased by a household for the benefit and use of its members. Since the household is the final user of this service, the payment is classified as private final consumption expenditure. It is not investment merely because education may improve human skills in the long run; in the expenditure classification, the household's purchase of the current education service is recorded as consumption.

Raw material is an intermediate input because the firm uses it to produce another good. Its value becomes part of the value and price of the finished final product. The final product is then counted when it is sold for final use or investment. Adding the raw-material purchase separately would count the same value once as an input and again in the final product, causing double counting. Thus only the appropriate final expenditure is recorded.

National product measures the value of goods and services produced during a particular accounting period. An old good was produced and counted in an earlier period, so adding its entire resale price again would count past production as current production. The current sale itself does not create a new good. However, a current service connected with the sale, such as brokerage or commission, may be included because that service is produced during the current year.

A scholarship is generally a transfer payment: the recipient receives money, but the government does not obtain a currently produced good or service in return. Since the expenditure method includes spending on final goods and services, a scholarship is not directly included in final consumption expenditure or investment expenditure. It may finance consumption later, but the transfer itself is excluded to avoid counting it as current production.

A new machine purchased by a private firm is a capital good because it helps produce goods and services over more than one accounting period. Its purchase therefore forms part of investment expenditure, specifically gross fixed capital formation. It is not household consumption, government consumption, or net exports. In the expenditure identity, such investment contributes to aggregate demand and GDP in the period when the machine is produced.

A small routine repair of a house normally provides a current maintenance service to the household and does not create or substantially improve a fixed asset. Therefore, it is generally classified as private final consumption expenditure in the expenditure method. This differs from constructing a new house or carrying out a major improvement that increases the productive or usable capacity of the asset and may be treated as capital formation.

A newly constructed factory building is a fixed capital asset used repeatedly in the production process over several years. Its construction therefore counts as gross fixed capital formation, which is a component of investment expenditure in the expenditure method. It is not household food consumption, a transfer payment, or the purchase of an old good. The word “new” is important because current production is involved.

An old-age pension is a transfer payment. The government gives income to the beneficiary but receives no currently produced good or service in return, so the payment is excluded from government final consumption expenditure. In contrast, teachers’ salaries, office stationery and medicines purchased for public hospitals support the provision of current government services and are included as government consumption expenditure.

A firm’s purchase of a newly produced machine is investment expenditure because the machine is a capital good that will be used in production over several years. The purchase of an old house is mainly a transfer of ownership, unemployment allowance is a transfer payment, and buying shares is a financial transaction rather than current production. Therefore, only the new machine contributes to investment in GDP.

To convert GDP at market price into national income, first deduct depreciation to obtain NDP at market price. Then deduct net indirect taxes to convert market prices into factor cost. Finally, add net factor income from abroad (NFIA) to change the domestic measure into a national measure. Thus, the correct sequence is depreciation deduction, net indirect tax deduction, and NFIA addition.

The purchase of shares is a transfer of ownership of an existing financial asset, such as an equity claim. It does not represent current production of a new good or service during the accounting period. Therefore, it is excluded from consumption and investment expenditure in the expenditure method. Brokerage or other newly produced financial services may be counted separately, but the share purchase itself is not.

A bond is a financial claim issued by a government or institution. Buying it transfers funds in exchange for that claim, but it does not itself purchase a newly produced machine, building, or other capital good. Consequently, the bond transaction is not counted as real investment in the expenditure method. Any separately charged financial service may be counted as a service.

A laptop manufactured abroad is an imported final good when purchased by a domestic household. The household payment is initially part of consumption expenditure, but the expenditure formula subtracts imports: GDP = C + I + G + (X − M). Subtracting M prevents foreign production from being incorrectly counted in domestic output. Therefore, the directly affected external-sector component is imports.

The medicine is produced within India but purchased by a foreign resident. From India’s national-accounting perspective, this is a sale of a domestically produced good to the rest of the world, so exports (X) increase. In the expenditure identity C + I + G + (X − M), higher exports raise net exports, provided imports do not change. It is not a transfer payment or depreciation.

Net investment measures the addition to the capital stock after allowing for the capital consumed through wear and tear. The formula is Net investment = Gross investment − Depreciation. Substituting the given values gives ₹900 − ₹150 = ₹750. Therefore, option C is correct. ₹900 is the gross amount invested, while ₹150 replaces or represents worn-out capital.

Unpaid household work, such as cooking, cleaning, or caring for family members, creates useful services but normally has no observed market price or recorded market transaction. National accounts therefore face difficulty assigning a consistent value without arbitrary estimates. Paid domestic services are included because they have a market payment. Thus, difficulty of market valuation is the best answer, although the work itself is economically useful.

A domestic servant provides a current service directly consumed by the household. Since the household pays for this service in a market transaction and does not use it as an input to produce another market good, the payment is classified as private final consumption expenditure. It is not intermediate consumption, financial investment, or net export. The payment also creates recorded income for the worker.

A final good produced for the producer’s own use is still part of current production, even though it is not sold in an open market. National accountants estimate what the good would have sold for in a comparable market transaction and record that amount as imputed value. This prevents production from being omitted merely because no cash sale occurred. It is neither an import nor a transfer payment.

Constructing a new school building creates a durable physical asset that will provide educational services over several years. Because the asset is created for public use and belongs to the government sector, the expenditure is classified as government capital formation, or public investment. It is not a transfer payment, because the government receives a newly produced asset, and it is not an import unless the construction output itself is produced abroad.

When the government purchases textbooks and supplies them free of cost through public schools, it is providing an educational service to citizens. The expenditure is therefore treated as government final consumption expenditure, because the government is the final user of the books in delivering that public service. It is not a sale of old goods, an export, or a purchase of a financial asset.