Methods of calculating national income - Expenditure Method

The expenditure method estimates domestic product by adding expenditure on final goods and services produced within the economy. Its usual components are private final consumption expenditure, investment expenditure, government final consumption expenditure and net exports, represented as C + I + G + (X − M). Intermediate goods are excluded to prevent double counting.

Private final consumption expenditure is represented by C in the expenditure identity. It records household spending on final goods and services, such as food, clothing, transport and personal services. I represents investment, G represents government final consumption expenditure, and X represents exports. Therefore, C is the only suitable symbol for private consumption.

Investment expenditure is represented by I in the expenditure identity. It includes spending on fixed capital such as machinery and buildings, as well as changes in inventories or stocks, depending on the accounting framework. C denotes private consumption, M denotes imports, and T commonly denotes taxes, so only option B is correct.

Government final consumption expenditure is represented by G in the expenditure identity. It covers the government’s expenditure on currently produced final goods and services used to provide public services, including relevant employee compensation and purchases of services. C denotes private consumption, I denotes investment, and M denotes imports; hence option C is correct.

Net exports are calculated as the value of exports minus the value of imports, written as X − M. Exports add to domestic expenditure because they represent domestic production purchased by foreigners, whereas imports are subtracted because they are included in consumption, investment or government spending but were produced abroad. Therefore, option D is correct.

Gross domestic capital formation includes expenditure on newly produced fixed assets that support production over more than one period, along with inventory changes. A firm’s purchase of a new machine is therefore investment and part of GDCF. Household food purchases are consumption, teachers’ salaries are government consumption, and an imported phone is not domestically produced capital formation.

Under the expenditure method, GDP at market price is calculated as C + I + G + (X − M). Substituting the given values gives 500 + 150 + 200 + (100 − 80) = 500 + 150 + 200 + 20 = ₹870. Therefore, option A is correct. Net exports are added when exports exceed imports and reduce GDP when imports are greater.

Expenditure by households on goods and services that satisfy their current wants, such as food, clothing and education, is classified as private final consumption expenditure. These purchases are for final use rather than for producing another good or earning a return as an investment. Thus, option A is correct and this expenditure is included in the consumption component of the expenditure method.

A newly purchased machine is a capital good used in the production process over a period of time. Its purchase is therefore recorded as investment expenditure, specifically fixed capital formation, rather than as household consumption. It is not an import unless the question specifically states that it was purchased from abroad. Hence, option B is correct.

Police protection and public administration are final services provided by the government. The expenditure incurred by the government to produce or provide these current services is counted as government final consumption expenditure, represented by G. It is therefore included in the expenditure approach to GDP.

The purchase of intermediate raw materials is not counted separately in the expenditure method because those materials are used to produce final goods. Including both the raw materials and the final goods would count the same economic value more than once, creating double counting.

The old car was produced and counted in the national output of an earlier period. Counting its full resale price again would not represent current-year production and could lead to duplication. Therefore, the purchase price of the old car is excluded, although any current-year brokerage or repair service may be counted.

The old car itself is not current production, so its resale value is excluded from GDP. However, the agent performs a brokerage service during the current year. The commission is payment for that newly provided service and can therefore be included as current expenditure on services.

Exports are goods and services produced within the domestic economy but purchased by residents of other countries. Their value is therefore part of domestic production, even though the spending comes from abroad. Exports are added to GDP expenditure as X in the net-export term (X − M).

Households, firms, or the government may spend money on imported goods and services, but those goods were produced outside the domestic economy. Such spending is initially included in consumption, investment, or government expenditure, so imports are subtracted through M to exclude foreign production from domestic GDP.

Net exports are calculated as exports minus imports: NX = X − M. Using the given values, NX = 120 − 150 = −30. The negative sign shows that imports exceed exports by ₹30, creating a trade deficit for this component. Therefore, option C, −₹30, is the only correct answer.

Gross domestic capital formation means the expenditure incurred on acquiring new fixed capital assets, such as machinery, buildings and equipment, together with the increase in inventories or stocks during an accounting period. It represents gross investment made within the domestic territory. The purchase of old shares is a financial transaction, not current capital formation.

Change in stock is calculated as closing stock minus opening stock. If the closing stock is greater than the opening stock, the difference is positive. This increase in inventories is counted as positive inventory investment in the expenditure method, because unsold output produced during the period is treated as investment.

The change in stock is defined as closing stock minus opening stock. When closing stock is smaller than opening stock, the subtraction gives a negative value. This indicates that inventories have fallen during the period. The change would be zero only if closing and opening stocks were exactly equal.

Construction of a new house creates a durable fixed asset that provides housing services over several years. Therefore, its expenditure is treated as investment or gross fixed capital formation in the expenditure method. It is not ordinary current consumption, net exports or a transfer payment, even though households may use the house.

A government pension is a transfer payment because the recipient does not provide a current good or productive service in return for that payment. Including it directly as final expenditure would count an income transfer rather than newly produced output. If the pension is later spent on goods or services, that resulting purchase may enter consumption expenditure.

A scholarship is generally treated as a transfer payment because it is received without the student supplying a current good or productive service in exchange. It therefore does not itself represent payment for newly produced output and is not directly counted as final expenditure. Goods or services purchased later with the scholarship may be counted under the relevant expenditure category.

A doctor provides a current medical service directly consumed by the household. The household's payment for that service is therefore included in private final consumption expenditure. It is not government consumption because the household pays for it, and it is not capital formation because the payment does not create a productive fixed asset.

A newly constructed factory building is a fixed capital asset owned or used by the company for production over many years. Its construction expenditure therefore forms part of investment, specifically gross fixed capital formation, in the expenditure method. It is not private consumption, government expenditure or an import merely because construction materials may be purchased from elsewhere.

When a household buys a mobile phone for its own use, the phone is treated as a final consumption good. The payment is therefore included in private final consumption expenditure. The amount is not government investment, net exports or a transfer payment. If the phone were bought by a business for resale, its treatment would depend on inventory and final use.