Methods of calculating national income - Expenditure Method

When a shop purchases the mobile phone for resale, it is not yet a final consumption purchase by the shop. It is part of the shop's trading inventory and is treated as a change in stocks until it is sold to the final user. National-income accounting classifies the item according to its final use, so the eventual household purchase becomes consumption expenditure.

Only expenditure on final goods and services is counted because the value of intermediate goods is already included in the price of the final product. If intermediate goods were counted separately as well, the same economic output would be included more than once. Therefore, using final expenditure prevents double counting and gives a correct measure of GDP.

Salaries paid to government employees are included in government final consumption expenditure because they are payments for current services supplied during the accounting period. In contrast, an old-age pension is a transfer payment without a corresponding current service, sale of an old vehicle is a second-hand transaction, and share purchases are financial transactions rather than current production.

National income is obtained by adding net factor income from abroad, or NFIA, to domestic income. The formula is National Income = Domestic Income + NFIA. NFIA is factor income received by residents from abroad minus factor income paid to non-residents. Intermediate consumption would create double counting, while old goods and transfer payments do not represent current factor income from production.

A newly manufactured machine is a capital good and its purchase adds to the economy’s current capital formation, so it is included in investment expenditure. Buying company shares is a financial transaction and does not directly represent current production. Pension payments are transfers, while a used car was produced in an earlier period and its resale is not current investment.

Unemployment allowance is a transfer payment. It redistributes income but does not purchase a newly produced good or service during the current accounting period, so it is not included directly in final expenditure. Household purchases of bread are consumption, road construction is government investment or expenditure on current output, and exports are included as external demand.

National income is calculated by adding net factor income from abroad to domestic income. Therefore, National Income = Domestic Income + NFIA = ₹850 + ₹30 = ₹880. Because NFIA is positive, residents receive ₹30 more factor income from abroad than they pay abroad. Hence, option C, ₹880, is the correct answer.

National income equals domestic income plus net factor income from abroad: National Income = ₹850 + (−₹20) = ₹830. A negative NFIA means factor income paid to foreign residents is ₹20 greater than factor income received from abroad. Therefore, the negative amount reduces domestic income when converting it into national income, making option B correct.

The purchase of shares represents a change in ownership of a financial asset, not expenditure on currently produced goods or services. Since national income measures the value of current production, the share transaction itself is excluded from the expenditure method. Any brokerage or commission paid for arranging the transaction may be counted as payment for a current service.

Buying a bond is a financial investment because it transfers a claim on income or repayment from one holder to another. The purchase does not itself represent the production of a new machine, building, or other final good. Therefore, the bond purchase is excluded from expenditure on current output, although any service charge connected with the transaction may be included.

When a household buys a new car for personal use, the car is treated as a final consumption good because it is not being used as an input for resale or production by a business. Its purchase is therefore recorded under private final consumption expenditure, one of the main components of aggregate expenditure: C + I + G + (X − M).

For a taxi company, the car is purchased to provide transportation services over time and to earn business revenue. It is therefore a durable capital good used in production, not a household consumption good. Its purchase is recorded as private investment expenditure, specifically business fixed capital formation, in the expenditure method.

Spending on constructing a new road creates a durable public asset that will provide transport services over several years. It is therefore treated as government investment or public capital formation, rather than private consumption or a transfer payment. The classification reflects the creation of a productive asset through government expenditure.

Administrative work performed by government employees is a current final service supplied by the government. The wages paid to provide this service are therefore included in government final consumption expenditure. They are not private investment, net exports, or expenditure on an old good, because none of those categories describes the current public service produced.

When foreigners purchase goods or services produced within India, the transaction is recorded as an export because domestic production is sold to the rest of the world. In the expenditure identity, exports are represented by X and are added, while imports M are subtracted. Thus net exports enter as X − M.

A mobile phone manufactured abroad and purchased by an Indian household is an imported good. The household's payment is initially part of consumption spending, but imports are recorded separately and deducted in the expenditure identity so that only domestic production is measured. Consequently, the import component M increases, not exports, government expenditure, or depreciation.

Under the expenditure method, GDP at market price is calculated as GDPₘₚ = C + I + G + (X − M). Substituting the given values: 1000 + 300 + 250 + (200 − 150) = 1000 + 300 + 250 + 50 = ₹1,600. Imports are subtracted because they are produced abroad, while exports are added because they represent domestic production purchased by foreigners.

Final goods produced for the producer’s own use are part of current domestic production even though they are not sold in a market. Their reasonable estimated, or imputed, market value is included in national income and expenditure calculations. This prevents production for self-consumption from being ignored.

A paid domestic servant provides a market service to the household. The salary paid for that service is expenditure by the household on final consumption, because the service directly satisfies the household’s wants and is not used as an input to produce another market product.

Unpaid household activities, such as cooking or cleaning for one’s own family, produce useful services but usually have no observed market price or expenditure transaction. National accounts therefore generally exclude them from measured GDP, although the work has real economic value and contributes to household well-being.

The first and most important precaution in the expenditure method is to count spending only on final goods and services. Expenditure on intermediate goods is excluded because its value is already included in the price of the final product. Including both would count the same output more than once and lead to double counting. Second-hand goods and transfer payments are also excluded from current production.

The sum of expenditure on final goods and services—private consumption, government final consumption, investment, and net exports—first gives GDP at market prices. Depreciation, net indirect taxes, and other adjustments are applied later to derive aggregates such as NDP at factor cost.

Private final consumption expenditure records household spending on final goods and services, such as food, clothing, transport, and household services. Raw materials are intermediate inputs, pensions are transfer payments, and old shares are financial transactions; none belongs to private final consumption expenditure.

Buying a new machine is gross investment because the machine is a newly produced capital good that adds to the economy’s productive assets or capacity. Food is household consumption, a second-hand book does not represent current production, and a scholarship is a transfer payment rather than investment expenditure.

Government final consumption expenditure includes the value of current goods and services consumed by the government while performing its regular functions. Administrative services, such as public administration, policing, and general government services, are current final services. Buying old bonds is a financial transaction, while seeds are a producer input and a television is household consumption; therefore, neither belongs to government final consumption expenditure.