Methods of calculating national income - Expenditure Method

Gross capital formation includes expenditure on newly produced fixed assets that increase or maintain productive capacity, such as a new machine purchased by a firm. The purchase of an old house is a resale of an existing asset, and buying existing shares is a financial transaction. An old-age pension is a transfer payment, not expenditure on current production. Therefore, option A is correct.

The expenditure formula is GDP = C + I + G + (X − M). Domestic consumers, firms or the government may spend on imported goods, so that spending initially appears in consumption, investment or government expenditure. Imports are subtracted because they were produced abroad. This adjustment ensures that GDP measures only production within the domestic territory.

A private school provides an educational service to a household. When a family pays the school fee, it purchases that service for final use rather than for resale or production of another good. Therefore, the payment is recorded as private final consumption expenditure, or PFCE. It is not capital formation, net exports or government final consumption expenditure.

The value of an old machine was already counted when the machine was newly produced and sold. A later sale merely transfers ownership of an existing asset from one person or firm to another; it does not create new output in the current accounting period. Counting the resale again would cause double counting. Therefore, the sale itself is excluded from current GDP expenditure.

Gross capital formation is broader than the purchase of machines alone. It includes gross fixed capital formation, such as expenditure on new buildings, machinery and equipment, together with changes in inventories or stocks. Unsold finished goods can therefore enter GCF through stock accumulation. Pensions are transfer payments, exports belong to net exports, and private services are generally consumption expenditure.

The word ‘gross’ includes depreciation, also called consumption of fixed capital. Subtracting depreciation from GDP preserves the domestic and market-price dimensions but changes gross to net. Thus, GDP at market price minus depreciation equals NDP at market price. No adjustment for net factor income from abroad or product taxes and subsidies has been made, so the other options are incorrect.

A household’s purchase of a foreign car is initially recorded in consumption expenditure because the household is the final user. However, the car was produced outside the domestic territory, so its value is also recorded as an import and subtracted in the net-export term. The consumption addition and import deduction offset one another, ensuring that foreign production does not raise domestic GDP.

A government hospital may provide treatment to patients without charging them a fee, but the government purchases or produces the medical service by paying doctors, nurses and other suppliers. In national-income accounting, the value of such publicly provided services is measured through the government’s expenditure. Therefore, the cost is included in government final consumption expenditure, or GFCE, not PFCE, net exports or financial investment.

In the expenditure method, the purchase of new capital goods by producers is treated as investment or gross capital formation, which is a final expenditure. Raw materials are intermediate goods and are excluded separately to prevent double counting. Wages and taxes are income-distribution or government-revenue items, not producer-sector final expenditure.

An imported machine is a capital good acquired by a domestic firm, so it may be recorded under gross capital formation. However, it was produced abroad and must be deducted through imports in the expenditure formula. This adjustment prevents foreign production from being counted in domestic GDP and makes option A correct.

An old-age pension is a transfer payment. It redistributes purchasing power from the government to households but is not payment for a currently produced good or service. Consequently, it is excluded from GDP final expenditure. A new car, school building, and machine represent expenditure on current final goods or capital goods and are included.

Only expenditure on final goods and services should be counted because their prices already embody the value of the intermediate inputs used to produce them. Adding intermediate goods separately would count the same production more than once. Resold goods and taxes alone do not measure current final output, so option B is correct.

When a foreign embassy purchases services supplied within India, a foreign unit is paying for output produced in the domestic territory. From the perspective of the domestic economy, this is foreign expenditure on domestic production and is therefore recorded as an export of services. It is not an import or household consumption.

Buying a share, bond, or another financial asset usually transfers ownership of a financial claim rather than purchasing a newly produced good or service. National expenditure measures current production, so this purely financial transaction is excluded. Fees paid for financial services may be counted separately, but the asset purchase itself is not GDP expenditure.

Ingredients purchased by a household for cooking and eating at home are bought for final consumption, not for resale or further commercial production. Therefore, their value is recorded as private final consumption expenditure (PFCE). PFCE includes household spending on final goods and services, while government consumption, capital formation, and net exports represent different expenditure categories.

National income is NNP at factor cost. Starting with GDP at market price, subtract depreciation to obtain NDP, subtract net indirect taxes to convert market prices into factor cost, and add NFIA to convert domestic product into national product: 2000 - 150 - 250 + 40 = 1640. Hence, national income is 1640.

Many government services, such as administration, defence, and public education, are not sold at a meaningful market price. Their value is therefore estimated mainly from the cost of production, including compensation or salaries of government employees. This compensation contributes to government final consumption expenditure (GFCE), not private consumption, investment, or net exports.

Monthly rent is payment for the current use of a housing service. Since the household is consuming that service and is not acquiring a capital asset through the rent payment, it is classified as private final consumption expenditure. It is not gross capital formation, government investment, or imports merely because the service is provided by a landlord.

An owner-occupied house provides housing services to its owner even though no actual rent is paid. To measure total production and consumption consistently, national accounting imputes a rental value for this service. The imputed rent is therefore included in private final consumption expenditure, rather than being ignored or treated as a transfer payment.

Seeds used by a farmer as an input in producing crops are intermediate goods because their value is used up or transformed during further production. Counting their full purchase value as final expenditure would cause double counting when the value of the harvested crop is also counted. Therefore, this situation illustrates the distinction between intermediate and final goods.

Net exports are calculated as exports minus imports, or NX = X - M. If the value of exports equals the value of imports, the difference is zero and net exports are zero. Exports greater than imports produce positive net exports, while imports greater than exports produce negative net exports. Imports being zero alone is not sufficient unless exports are also zero.

An unemployment allowance is a transfer payment. The recipient receives money without supplying a currently produced good or service to the government in return. Consequently, the payment itself is not counted directly in government final consumption expenditure, capital formation, or net exports. If the recipient later spends it on a final good or service, that later spending may be included under the relevant consumption category.

The expenditure method measures aggregate expenditure on final goods and services. Its four principal components are private final consumption expenditure (PFCE), government final consumption expenditure (GFCE), gross capital formation (GCF), and net exports (NX). Wages, rent, interest, and profit are factor-income components used in the income method, not the expenditure method.

GDP measures the market value of all final goods and services produced within a country’s domestic territory during a specified period. It follows the territorial principle, not the nationality or ownership principle. Therefore, output produced in India by a foreign-owned company is included in India’s GDP, although the related factor income may later be included in another national-income measure.

India’s GDP follows the domestic-territory principle: it counts final production occurring within India’s economic territory, regardless of the producer’s nationality. If an Indian-owned company produces a good abroad, that production belongs to the GDP of the country where it occurs, not India’s GDP. The company’s nationality may matter for other national-income concepts, but not for this GDP rule.