Methods of calculating national income - Expenditure Method

Correct answer: A. Flour purchased by a bakery

Explanation: Flour purchased by a bakery is an intermediate input used to produce bread and other bakery products. It is not bought for final consumption by the purchasing unit, so it is excluded from private final consumption expenditure to avoid double counting. In contrast, household purchases of bread, medical services and clothes are final consumption expenditures.

Correct answer: B. It is a transfer payment, not a payment for current production

Explanation: Lottery prize money is a transfer payment. The recipient receives income without supplying a currently produced good or service in exchange. Consequently, the prize does not represent expenditure on current production and is not included as a component of GDP through the expenditure method. Option B gives the precise classification and reason; option A is only a general description.

Correct answer: A. Foreign demand like exports

Explanation: When foreign tourists purchase goods and services produced within the domestic economy, their expenditure is demand coming from the rest of the world. In national accounting, such purchases are treated like exports of goods or services because they generate receipts from non-residents for domestic production. They are therefore added through the exports component, X, of net exports.

Correct answer: B. PFCE

Explanation: A domestic servant provides a household service that is purchased for the household's current and final consumption. The household's payment is therefore included in Private Final Consumption Expenditure (PFCE). It is not Gross Capital Formation because the payment does not create or acquire a productive fixed asset. It is not net exports because the service is supplied domestically, and it is not net indirect tax because the payment is wages for a service.

Correct answer: A. Because depreciation has not been deducted from it

Explanation: Gross capital formation is called gross because it measures total investment before allowing for the wear and tear of fixed assets. Depreciation, also called consumption of fixed capital, is not deducted from GCF. When depreciation is subtracted, the result is net capital formation. Thus, option A correctly identifies the distinction between gross and net investment.

Correct answer: A. Purchase of a new machine by a firm from a domestic producer

Explanation: A new machine purchased from a domestic producer is a currently produced capital good. Its value is therefore recorded as gross domestic capital formation, a component of investment expenditure in GDP. A used car was produced in an earlier period, so its resale is not current production. Buying shares is a financial transaction, and an old-age pension is a transfer payment without a direct exchange for current output.

Correct answer: A. 2700

Explanation: The relationship between these aggregates is NNP at factor cost = NDP at factor cost + NFIA. Substituting the given values gives NNPFC = 2800 + (−100) = 2700. Negative net factor income from abroad means that factor payments going abroad exceed factor income received from abroad by 100. Therefore, national income is lower than domestic income by 100 units.

Correct answer: A. Net exports

Explanation: Net exports, calculated as exports minus imports, are included in the expenditure approach because they represent the foreign-sector contribution to expenditure on domestically produced final goods and services. The income approach instead totals incomes generated in production, including compensation of employees, operating surplus and mixed income. Therefore, net exports is the only listed component belonging specifically to the expenditure method. It is not itself a factor income.

Correct answer: A. GDP = C + I + G + (X − M)

Explanation: Under the expenditure method, GDP is calculated by adding expenditure on private final consumption (C), investment or capital formation (I), government final expenditure (G), and net exports (X − M). Exports are added because they are domestic production sold abroad, while imports are subtracted because they are already included in other expenditure components but are produced outside the domestic economy.

Correct answer: A. Private final consumption expenditure

Explanation: In the expenditure formula GDP = C + I + G + (X − M), C stands for private final consumption expenditure. It includes households’ spending on final goods and services, such as food, clothing, transport and personal services. Intermediate purchases are excluded to prevent the same production from being counted more than once.

Correct answer: A. Investment

Explanation: In GDP = C + I + G + (X − M), I represents investment expenditure. In national-income accounting, investment includes spending on new fixed assets, construction, machinery and changes in inventories. It does not simply mean buying shares or financial securities, because such transactions transfer ownership of existing financial claims rather than directly creating current output.

Correct answer: A. Government final consumption expenditure

Explanation: In the expenditure approach, G denotes government final consumption expenditure, or government expenditure on currently produced goods and services. It may include public administration, defence, education and other government services, subject to accounting rules. G is not the same as GNP, saving or exports, which have different meanings in national-income accounting.

Correct answer: A. Net exports

Explanation: X − M means exports minus imports and is called net exports. Exports are included because they represent domestic production purchased by the rest of the world. Imports are subtracted because they are produced abroad and may already be included in consumption, investment or government expenditure. Net exports may therefore be positive, zero or negative.

Correct answer: A. Positive

Explanation: Net exports are calculated as X − M, where X represents exports and M represents imports. If exports are greater than imports, the value of X − M is greater than zero, so net exports are positive. Net exports are zero only when exports equal imports, and they are negative when imports exceed exports.

Correct answer: B. Negative

Explanation: Net exports are defined as exports minus imports, or X − M. When imports are greater than exports, M is larger than X, so subtracting M from X produces a negative value. Thus net exports are negative. They would be zero only if exports and imports were equal, not merely because both were present.

Correct answer: A. C + I + G + (X − M)

Explanation: Under the expenditure method, GDP is measured by adding expenditure on final goods and services: GDP = C + I + G + (X − M). C denotes private final consumption expenditure, I denotes investment, G denotes government final consumption and investment expenditure, and X − M represents net exports. Imports are subtracted because they are included in other expenditure components but are not domestic production.

Correct answer: B. −₹300 crore

Explanation: Net exports are calculated as exports minus imports: NX = X − M. Substituting the given values gives NX = ₹900 crore − ₹1,200 crore = −₹300 crore. The negative result means that imports exceed exports by ₹300 crore, so the country has a trade deficit for this comparison.

Correct answer: A. Because imports are not domestic production

Explanation: The expenditure total initially includes spending on both domestically produced and foreign-produced goods and services. Since GDP measures production within domestic territory, the value of imports must be subtracted to remove foreign production from that total. This is why the expenditure identity uses net exports, X − M: exports are added as domestic output sold abroad, while imports are deducted.

Correct answer: A. ₹80 crore

Explanation: Net exports are calculated as exports minus imports: NX = X − M. Therefore, NX = ₹300 crore − ₹220 crore = ₹80 crore. The positive result means exports exceed imports by ₹80 crore, so the country has a trade surplus for this calculation. ₹520 crore is the combined total, not net exports; the individual figures are not the answer to the subtraction.

Correct answer: A. A household buying a new book

Explanation: When a household buys a new book for its own use, it is purchasing a final good and the expenditure is classified as private final consumption expenditure. A factory’s raw-cotton purchase is an intermediate input, a pension is a transfer payment, and salary earned abroad relates to factor income from the rest of the world rather than domestic private consumption.

Correct answer: A. C

Explanation: In the expenditure method, GDP is commonly expressed as GDP = C + I + G + (X - M). Here, C means private final consumption expenditure by households, I means investment expenditure, G means government final consumption expenditure, and X - M represents net exports. Therefore, private final consumption expenditure is represented by C, making option A correct.

Correct answer: A. X − M

Explanation: Net exports measure the difference between a country’s exports and imports. Therefore, net exports = X − M, where X represents exports and M represents imports. This term is included in the expenditure formula GDP = C + I + G + (X − M). A positive value means exports exceed imports, while a negative value means imports exceed exports.

Correct answer: A. GDP = C + I + G + (X − M)

Explanation: Under the expenditure method, GDP is calculated by adding private final consumption expenditure (C), investment expenditure (I), government final consumption expenditure (G), and net exports (X − M). Exports are added because they represent domestic production sold abroad, whereas imports are subtracted because they were produced outside the domestic economy. Thus, GDP = C + I + G + (X − M).

Correct answer: A. Exports

Explanation: In GDP = C + I + G + (X − M), X stands for exports. Exports are goods and services produced within the domestic economy and sold to buyers in other countries, so their value represents domestic production and is added to GDP. M stands for imports and is subtracted because imported goods and services are produced abroad. The term X − M is called net exports.

Correct answer: A. Imports

Explanation: In the expenditure method, GDP is calculated as GDP = C + I + G + (X − M). Here, M represents imports, while X represents exports. Imports are subtracted because they are goods and services produced outside the domestic economy. Although residents may spend money on imports, that spending must not be counted as domestic production. Thus, X − M represents net exports.