Methods of calculating national income - Expenditure Method

The expenditure method measures final expenditure through private final consumption expenditure (PFCE), government final consumption expenditure (GFCE), gross capital formation (GCF), and net exports (NX). These components are added to obtain expenditure-based GDP, subject to the relevant accounting conventions. Wages, rent, interest, and profit belong mainly to the income method, while output and value added belong to the product method. Therefore, option A is correct.

Wages paid to government employees are payments for current services supplied to the government, such as administration, defence, education and public health. Therefore, they are included in Government Final Consumption Expenditure. Share purchases are financial transactions, pensions are transfer payments, and an old building is an existing asset rather than current production.

Road construction creates a durable infrastructure asset that provides services over several years. Hence, government spending on a new road is treated as gross capital formation, specifically public investment, rather than current government consumption. It is not a transfer payment because the government receives a newly produced capital asset in return.

A foreign tourist purchases a hotel service produced within India’s domestic territory. From India’s perspective, the service is supplied to a non-resident and is therefore treated as an export of services. The expenditure contributes to domestic production and is included through exports in the expenditure formula: GDP = C + I + G + X − M.

The Indian resident is purchasing a hotel service produced outside India’s domestic territory. Therefore, the transaction is an import of services from India’s viewpoint. Although the resident is consuming the service, the value is not produced domestically; it is therefore deducted as an import in the expenditure identity GDP = C + I + G + X − M.

Electricity consumed by a business during production is an input used to produce another good or service. It is therefore intermediate expenditure and its separate inclusion with the final product could cause double counting. Electricity purchased by households for current use, however, is normally final consumption expenditure.

GDP is a domestic concept: it measures the market value of final goods and services produced within a country’s domestic territory during a specified period, regardless of whether producers are residents or foreigners. This is why expenditure by foreign tourists on services produced in India can count as exports, while residents’ purchases abroad are imports.

The consumer’s purchase of the imported mobile phone is initially recorded as private final consumption expenditure. However, the phone was produced abroad, so its value is subtracted as imports in the formula GDP = C + I + G + (X − M). Consequently, the transaction does not increase domestic GDP; it records consumption but removes the foreign-produced component.

Government education may be provided without a fee, but teachers, buildings, equipment and administration involve expenditure and current production of a service. Therefore, the estimated value or cost of the service is included in government final consumption expenditure. It is not private consumption, net exports or a transfer payment.

A donation transfers purchasing power from the donor to another person or institution, but the donor does not receive a newly produced final good or service in exchange. It is therefore treated as a transfer rather than expenditure on current production. Only subsequent spending on eligible final goods and services enters the expenditure measure.

Salaries paid to government employees are payments for current services supplied by those employees, such as administration, education, policing and healthcare. They therefore form part of government final consumption expenditure. Pensions, interest and scholarships are generally transfer payments because they are not payments for current goods or services supplied to the government.

Domestic product measures income or production generated within a country’s domestic territory, regardless of who owns the factors of production. National product measures the income accruing to the country’s residents. The adjustment is made through net factor income from abroad: GNP equals GDP plus NFIA, so NFIA creates the difference.

The value of raw materials and other intermediate goods is already embodied in the market value of the final product. If expenditure on the raw materials is added separately to expenditure on the final product, the same production value is counted twice. The expenditure method therefore includes final goods and services, not intermediate purchases.

Goods bought by a producer or trader for resale are acquired as inputs into a later transaction rather than for final use by the purchaser. Their value is therefore treated as an intermediate purchase and is excluded from final expenditure to prevent double counting. When the goods are finally sold for final use, their value can be represented in final expenditure.

Gross capital formation represents investment in fixed assets, inventories and other capital-related items, before deducting depreciation. Government final consumption expenditure represents the value of current goods and services used or provided by the government, such as administration, education and public health. Thus GCF is an investment component, while GFCE is a government consumption component of expenditure.

The purchase of company shares is a financial transaction and does not represent payment for a currently produced final good or service. Thus, the value of the shares is excluded from GDP. A new car is consumption expenditure, public hospital services are government expenditure, and a new machine is investment expenditure. Brokerage or other current financial services connected with the transaction may be counted.

Goods produced for self-consumption are still part of current production even though they are not sold in an open market. National-income accounting therefore imputes or estimates their market value and includes it in the relevant final expenditure. Ignoring such output would understate production and income. Imports and depreciation are unrelated to this treatment, so option A is correct.

A newly constructed factory building is a durable capital asset used repeatedly in the production process. The company’s expenditure on it is therefore recorded as investment, specifically gross fixed capital formation. It is not household consumption, government consumption, or a transfer payment. Since the question asks for expenditure before deducting depreciation, the appropriate term is gross fixed capital formation.

Salaries paid to government employees are payments for current labour services supplied to the government. They therefore form part of government final consumption expenditure, subject to the national-accounting framework. Pensions and scholarships are transfer payments because recipients do not provide current goods or services in direct exchange. Selling an old building is a disposal of an existing asset, not current government consumption.

Intermediate goods are used as inputs in producing final goods, and their value is already embodied in the price of those final goods. If intermediate purchases and final expenditure were both added, the same output value would be counted more than once. Excluding or separately controlling intermediate expenditure prevents this double counting and gives a correct measure of domestic output.

An old asset was produced and counted when it was originally created, so its resale does not represent new current production and its full purchase price is excluded from GDP. Brokerage, however, is payment for a financial or agency service supplied during the current period. The newly produced service is therefore included, making option A correct.

An old-age pension is a transfer payment. The government gives money to the pension recipient, but it does not receive a currently produced good or service in return. Government final consumption expenditure is counted only when the government purchases current final goods or services, such as public administration, education, or health services. Therefore, the pension is excluded from GDP expenditure.

Construction of a new bridge creates a newly produced fixed asset that provides productive services for several years. It is therefore included in gross fixed capital formation, a component of investment expenditure. Salary is factor income, raw materials are intermediate inputs, and an old machine is an existing asset whose sale generally transfers ownership rather than adding newly produced capital.

The classification of a durable good depends on its economic use. A car purchased by a household to provide taxi services is used repeatedly in the production of a market service, so it functions as a capital good and is treated as investment. A car used only for family travel provides consumption services and is classified as household consumption rather than investment.

An old-age pension is a transfer payment: the government distributes income without purchasing a currently produced good or service in exchange. It is therefore excluded from GDP expenditure. A new bicycle is household consumption, new school textbooks are government final expenditure, and a new machine is investment expenditure. The expenditure identity counts current final output, not pure transfers.