Methods of calculating national income - Expenditure Method

Correct answer: A. PFCE is consumption, whereas GCF is investment

Explanation: PFCE records expenditure by households and non-profit institutions on final goods and services used for current consumption, such as food, clothing, and personal services. GCF records investment expenditure that creates or acquires assets for future production, including fixed capital formation, changes in inventories, and valuables. Thus, PFCE represents consumption, while GCF represents investment.

Correct answer: A. New capital formation

Explanation: The purchase of an old building is not new capital formation because the building was produced in an earlier period and its value has already been counted in that earlier period’s output. The transaction merely transfers ownership of an existing asset. However, a current-year brokerage or legal service connected with the sale may be included because it represents current production.

Correct answer: A. It can be included if it is payment for a current-year service

Explanation: The resale value of an old good is excluded from current GDP because the good was produced in an earlier period. A broker’s commission is different: it pays for brokerage service supplied during the current year. Since that service is current production, its value may be included in expenditure-based GDP, while the value of the old good itself is not counted again.

Correct answer: A. Salaries paid to government employees

Explanation: Government final consumption expenditure includes the value of current goods and services purchased or produced by the government for collective or individual public consumption. Salaries paid to government employees are payments for current public services and are therefore included. The sale of an old building is an asset transaction, share purchases are financial transactions, and pensions are transfer payments rather than payment for current production.

Correct answer: A. While converting GDP at market price into GDP at factor cost

Explanation: GDP at market prices reflects prices paid by purchasers and therefore includes net indirect taxes, calculated as indirect taxes minus subsidies. To convert GDP at market price into GDP at factor cost, net indirect taxes are subtracted: GDP at factor cost = GDP at market price − net indirect taxes. This adjustment separates market-price effects from payments received by factors of production.

Correct answer: B. Import

Explanation: The expenditure method measures domestic production through C + I + G + (X − M). A foreign online service may be purchased by a domestic household and initially appear in consumption expenditure, but the service is produced outside the domestic economy. Therefore, its value is deducted as an import (M), preventing foreign production from being counted in domestic GDP. Exports are goods or services produced domestically and purchased by foreigners.

Correct answer: B. Purchase of a new machine by a firm

Explanation: A firm’s purchase of a new machine is expenditure on a newly produced capital good. It increases productive capacity and is therefore recorded as gross fixed capital formation, a component of investment expenditure. An old house does not represent current production, unemployment allowance is a transfer payment, and buying shares is a financial transaction rather than expenditure on currently produced output.

Correct answer: A. GDP at market price (GDPMP)

Explanation: When private final consumption expenditure, investment expenditure, government final consumption expenditure, and net exports are added, the immediate result is GDP at market price: GDPMP = C + I + G + (X − M). This measures domestic production at market prices. NNP at factor cost requires further adjustments for depreciation, net factor income from abroad, and net indirect taxes; NFIA and depreciation are adjustment items, not the initial aggregate.

Correct answer: A. Because expenditure on imports does not represent domestic production

Explanation: The expenditure components C, I, and G can include spending on goods and services produced abroad. Such spending is initially recorded in domestic expenditure, but it does not represent output produced within the country. Imports are therefore subtracted in the identity GDP = C + I + G + X − M. This removes foreign production from domestic expenditure, while exports are added because they are domestically produced output purchased by foreigners.

Correct answer: A. ₹12 lakh

Explanation: Only the new machine represents current-period production of a capital good, so ₹12 lakh is included as investment in the expenditure method. The old machine was produced and counted in GDP in an earlier period; its resale is a transfer of ownership of an existing asset, not new current output. Therefore, the two purchase values are not added together, and the difference between them is not the relevant measure of investment.

Correct answer: B. Purchase of a new machine by a company

Explanation: A company’s purchase of a newly produced machine is investment because the machine is a current-production capital good that increases or maintains productive capacity. It is included in gross domestic capital formation. The sale of an old car merely transfers ownership, pension is a transfer payment, and share purchases are financial transactions rather than purchases of newly produced capital goods.

Correct answer: A. As an imported service

Explanation: When a domestic company purchases consultancy from a foreign provider, the expenditure is recorded as an import of services. The payment may be part of domestic consumption or investment expenditure depending on its use, but it is subtracted as M in the expenditure identity because the service was produced outside the domestic economy. This keeps GDP limited to domestic production.

Correct answer: A. As a service export

Explanation: The online education service is produced by an Indian company within the domestic economy and purchased by a foreign customer. It is therefore an export of services and is included in X in the expenditure identity. Exports are added because they represent domestic production purchased by non-residents. It is not an import, private domestic consumption, or a transfer payment.

Correct answer: A. (GDP₍MP₎) will be overestimated

Explanation: Under the expenditure method, GDP at market price is calculated as C + I + G + (X − M). Imported consumption goods are included in household consumption (C), but they are not produced domestically. Therefore, their value must be deducted through imports (M). If this deduction is omitted, ₹90 crore of foreign production is wrongly counted as domestic production, so GDP is overestimated.

Correct answer: A. Salaries are government final consumption and the road is government capital formation

Explanation: Administrative salaries are payments for the current services provided by government employees, so they form part of government final consumption expenditure. A newly constructed road is a durable public asset that provides services over many years; therefore, spending on it is government capital formation or public investment. Neither item is a transfer payment.

Correct answer: C. Payment of an old-age pension by the government

Explanation: An old-age pension is a transfer payment. It transfers purchasing power from the government to the recipient without the recipient supplying a currently produced good or service in return. Hence, it is not expenditure on current output and is excluded from GDP. A new bicycle is consumption, a new machine is investment, and foreign purchases of domestic software are exports.

Correct answer: A. Because it represents goods produced in the current year but not yet sold

Explanation: GDP measures production during the current year, not merely goods that are sold during that year. If firms produce goods that remain unsold, those goods are added to inventories and are treated as inventory investment. This ensures that all current production is counted. Purchases of shares and bonds are financial transactions, not investment in newly produced goods and services.

Correct answer: A. Only the ₹1 lakh service fee

Explanation: The old house is an existing asset and was produced in an earlier period, so its resale value is not counted in current-year GDP. The registration fee, however, is payment for a service supplied in the current period. If it represents an actual registration or brokerage service, that ₹1 lakh is included as current service output under the expenditure method.

Correct answer: A. Because it is spending on foreign services

Explanation: GDP measures the value of final goods and services produced within a country’s domestic territory. When Indian tourists spend money abroad, they purchase services or goods produced in a foreign economy, not domestic output. Therefore, this expenditure is treated as an import of services or goods and is deducted from domestic expenditure through the imports term rather than added to GDP.

Correct answer: A. Increase in investment by ₹6 lakh

Explanation: An increase in closing stock means that some goods produced during the current period remain unsold. Since these goods are part of current production, they are treated as inventory investment. Therefore, the expenditure method records the increase as an addition to investment, even though households or firms have not yet purchased the goods. It is not consumption, imports, or a transfer payment.

Correct answer: A. The current year's repair service may be included

Explanation: The purchase of an old building is a transaction involving an existing asset, so its full value does not represent current production and is not included in current GDP. However, repair work performed during the current year is a newly produced service. Its value can therefore be included in government final expenditure, provided it is measured as a current service and not confused with the old building's purchase price.

Correct answer: A. At their estimated market value

Explanation: Goods produced for self-consumption are not sold in a market, but they are still part of current production. National income accounting includes such output by assigning it an imputed or estimated market value based on the price of a comparable good. This prevents domestic production from being understated merely because the producer consumes the vegetables directly instead of selling them.

Correct answer: A. Imports (M)

Explanation: The household's payment is expenditure by a domestic resident, but the online course service is produced by a foreign provider. It is therefore an import of services, not domestic production. In the expenditure identity, imports are subtracted from C + I + G + X because domestic spending may purchase foreign output. Recording ₹25,000 under imports prevents foreign production from being counted in domestic GDP.

Correct answer: A. GDP at market price will be overestimated

Explanation: The expenditure identity is GDPMP = C + I + G + X − M. Exports are added because they represent foreign expenditure on domestically produced goods and services. Imports are subtracted because they represent spending on foreign production already included in domestic expenditure components. If imports are added instead, the calculation increases GDP by an amount that should have been deducted, so GDP is overestimated.

Correct answer: A. GDP at market price will be underestimated

Explanation: In the expenditure approach, GDPMP = C + I + G + X − M. Exports must be added because they are purchases by foreigners of goods and services produced domestically. If exports are deducted instead, the calculation removes an amount that should increase domestic production. Since imports are already correctly deducted, the additional error is a reduction caused by treating exports with the wrong sign. GDP is therefore underestimated.