Methods of calculating national income - Expenditure Method

In national income accounting, income, output, and expenditure are three approaches to measuring the same level of economic activity. Production creates income for factor owners, and that income finances expenditure on final goods and services. With suitable adjustments, the three totals should be equal.

National income is NNP at factor cost. Starting with GDP at market price requires three adjustments: subtract depreciation to change gross into net, subtract net indirect taxes to change market prices into factor cost, and add net factor income from abroad to change domestic product into national product. Thus, option A gives the complete conversion.

National income is NNP at factor cost. Starting from GDP at market price, subtract depreciation to obtain NDP at market price, subtract net indirect tax to convert market prices to factor cost, and add NFIA to move from domestic to national income: ₹4,500 − ₹400 − ₹300 + ₹100 = ₹3,900 crore. Therefore, option B is correct.

Using the expenditure method, GDP at market price is C + I + G + (X − M) = 950 + 300 + 250 + (140 − 210) = ₹1,430. To obtain NDP at factor cost, subtract depreciation and net indirect taxes: NDPFC = GDPMP − depreciation − net indirect tax = 1,430 − 80 − 60 = ₹1,290. Therefore, option C is correct.

GDP by the expenditure method is calculated as C + I + G + (X − M). An imported mobile may be included in household consumption spending, but its production took place abroad and therefore it must not increase domestic output. Deducting imports through M removes that foreign-produced component and prevents GDP from being overstated. It is not an export, depreciation item, or NFIA adjustment.

Road construction creates a durable public asset that provides services over several years. Therefore, the expenditure is treated as government investment or gross capital formation rather than routine government final consumption. It represents the acquisition or creation of fixed capital. It is not private consumption, because the government undertakes it; not a transfer, because a newly produced asset is created; and not an import.

Goods purchased by a firm for resale are not consumed by the firm as final goods. If they remain unsold, the value of the increase in inventories is recorded as inventory investment, a part of gross investment in the expenditure approach. This prevents current production from being omitted merely because the goods have not yet reached their final consumer. Household consumption and transfer payments are therefore inappropriate classifications.

The purchase price of an old good is excluded because the good was produced in an earlier period; counting it again would double-count past production. However, the agent or brokerage fee is payment for a current-period service and must be included. The net correction is −₹40,000 + ₹5,000 = −₹35,000. Thus, final expenditure must be reduced by ₹35,000.

Production for own consumption is still current production and contributes to economic output, even though no market transaction occurs. To include it in national accounting, the quantity is valued at an estimated or imputed market price comparable to the price of similar grain sold in the market. That value can be recorded as household final consumption. It is neither an import nor an old good.

The resale price of old equipment is excluded from current investment because the equipment was produced and counted in an earlier period. However, installation is a service performed in the current period. If the ₹20,000 fee pays for actual installation work, that newly provided service is part of current production and may be included in expenditure or capitalized as part of the current asset-formation cost. It is not automatically excluded merely because the equipment is second-hand.

The expenditure method measures spending on currently produced final goods and services. A government interest payment mainly transfers financial income from the borrower to the lender; it does not, by itself, purchase a newly produced commodity or service. Therefore it is not counted as final production expenditure. The financial transaction may affect income distribution and government accounts, but it is different from government purchases of goods and services, which are included in G.

The second-hand car was produced and counted in GDP in an earlier year. Including its complete resale price in the current year would count the same physical output again and cause double counting. The dealer, however, supplies a new brokerage or intermediation service during the current year. The dealer's commission is payment for that current service and is therefore included in current GDP. Thus only the old car's resale value is excluded, while the service charge is included.

The expenditure method initially estimates domestic product by adding final consumption, investment, government expenditure, and net exports. After making the depreciation and net-indirect-tax adjustments, the result can be expressed as NDP at factor cost, or domestic income. To move from domestic income to national income, net factor income from abroad (NFIA) is added: National Income = NDPFC + NFIA. If NFIA is negative, the addition reduces national income; if it is positive, national income exceeds domestic income.

GDP at market prices is a gross, domestic, market-price measure. National income is normally a net, national, factor-cost measure. Therefore three conceptual adjustments are required: subtract depreciation to move from gross to net, subtract net indirect taxes to move from market prices to factor cost, and add NFIA to move from domestic to national. In compact form, National Income = GDPMP − depreciation − net indirect taxes + NFIA. Ignoring these adjustments can give a materially incorrect measure of national income.

A newly imported machine is a capital good, so its purchase raises gross investment. However, the machine was produced abroad, not within the domestic territory; therefore, the value of imports also rises and is subtracted as M in the formula GDP at market prices = C + I + G + X − M. This prevents foreign production from being counted as domestic output.

The correct sequence avoids mixing different aggregates. First calculate GDP at market prices as C + I + G + (X − M). Convert it to NDP at factor cost by subtracting depreciation and net indirect taxes. Finally, add NFIA to NDP at factor cost to obtain national income, or NNP at factor cost. Not every supplied figure is added directly.

To move from a domestic measure to a national measure, net factor income from abroad (NFIA) is added. Depreciation is deducted to change gross into net, and net indirect taxes are deducted to change market prices into factor cost. Thus, after those necessary deductions, NFIA is the addition needed to obtain NNP at factor cost.

The old machine is a second-hand asset, so its purchase price does not represent current production and must not be counted again in GDP. However, installation is a service actually produced and supplied during the current accounting year. Its ₹25,000 fee is therefore current expenditure on a newly provided service and may be included, provided it is not already included elsewhere.

First calculate GDP at market price using the expenditure identity: GDPMP = C + I + G + (X − M) = 2,400 + 750 + 620 + (410 − 560) = ₹3,620. National income is NNP at factor cost, so subtract depreciation and net indirect tax and add NFIA: ₹3,620 − ₹300 − ₹220 + ₹80 = ₹3,180, not ₹3,330. Therefore the supplied answer choices are inconsistent. To preserve one valid answer, option A is corrected to ₹3,180.

An imported machine is a capital good purchased for investment, so its expenditure appears in gross investment I. Nevertheless, the machine was produced outside the domestic economy and therefore is not part of domestic GDP. Subtracting imports M removes its value from total expenditure and prevents foreign production from being wrongly counted as domestic production.

A newly constructed house is a newly produced final asset. Household expenditure on it is included in total final expenditure as gross fixed capital formation, not as final consumption expenditure in the narrow classification. An old machine is a second-hand transaction, a pension is a transfer payment, and resale goods are intermediate purchases that would cause double counting.

Use the relationship: National Income = GDP at market price − depreciation − net indirect taxes + NFIA. Substituting the values gives 3,750 = 4,400 − 300 − NIT − 100, or 3,750 = 4,000 − NIT. Therefore, NIT = 250 crore. The negative NFIA reduces national income relative to domestic product and must be entered with its negative sign.

First calculate GDP at market price using C + I + G + (X − M): 3000 + 1000 + 900 + (450 − 700) = 4650. To obtain NDP at factor cost, subtract depreciation to move from gross to net and subtract net indirect tax to move from market price to factor cost. Therefore, NDPFC = 4650 − 350 − 400 = ₹3,900. Hence option D is correct.

The purchase of old shares is a financial transaction involving a transfer of ownership of an existing financial asset. It does not represent current production of a new good or service, so its value is not included in final expenditure or GDP. By contrast, a new machine is investment expenditure, food is private consumption expenditure, and teachers’ salaries are payment for a current government service.

The brokerage fee is payment for a real-estate service produced during the current year. Therefore, it is included as expenditure on a current service and contributes to GDP. The sale price of an old house is excluded because the house was produced earlier. A resale of government bonds is only a financial-asset transfer, and a cash gift is a transfer payment, so neither represents current production.