Methods of calculating national income - Expenditure Method

Correct answer: B. Import of a service

Explanation: An advertising service purchased from a foreign supplier is produced outside the domestic economic territory. The payment therefore represents an import of services. In the expenditure identity, imports are included in the import component and are subtracted through net exports, NX = exports − imports. It is not an export merely because the purchaser is a domestic firm.

Correct answer: C. Sale of a used car from one household to another

Explanation: GDP records the value of currently produced final goods and services. A used car was included in GDP when it was originally manufactured, so its resale between two households is not current production and must not be counted again. Household consumption, government final consumption and net exports are expenditure components of GDP. A newly produced brokerage or transfer service connected with the sale may be counted separately.

Correct answer: B. Final expenditure on the book

Explanation: A scholarship is a transfer payment: it redistributes purchasing power but is not payment for a currently produced good or service, so it is not counted as production expenditure. When the student buys a newly produced book, the purchase is expenditure on a final good and is included in the appropriate final consumption component. Counting the scholarship again would cause double counting.

Correct answer: A. Salaries paid to government employees

Explanation: Government employees provide current administrative, educational, defence, health or other public services. Their salaries are therefore payments for current services and form part of government final consumption expenditure. Old-age pensions and public-debt interest are transfer payments or financial transfers, not purchases of current output. Proceeds from selling an old building are a disposal of an existing asset, not current consumption expenditure.

Correct answer: B. Import of services

Explanation: The location of production determines whether a service is domestic or foreign for GDP. Medical treatment received abroad is produced outside the domestic territory, even though the buyer is an Indian resident. The payment is therefore recorded as an import of services. In the expenditure identity, it is subtracted through imports so that foreign production is not counted in domestic GDP.

Correct answer: A. New machine is (GCF) and normal repair can be intermediate cost

Explanation: A newly produced machine is a capital good acquired for productive use, so its purchase is recorded as gross capital formation (GCF), provided it is produced domestically. Routine repairs normally maintain an existing asset rather than create a new one; therefore, they are treated as current or intermediate production expenses. Neither item is PFCE, NX, or NFIA merely because of the buyer or payment.

Correct answer: A. It can be included in GDP because it is domestic production

Explanation: GDP is a territorial measure: it records the value of final goods and services produced within the domestic economic territory during the period. Consequently, a service produced domestically can be included in GDP even when the supplier is foreign-owned. Ownership of the company is not the deciding criterion. An import is a service produced outside the domestic territory, while NFIA concerns income flows rather than the production value itself.

Correct answer: A. Because market price includes net indirect taxes

Explanation: Market price is the amount paid by buyers and reflects indirect taxes on products as well as subsidies. Net indirect taxes (NIT) equal indirect taxes minus subsidies. Factor cost measures the income accruing to factors of production, so the tax component must be removed and the subsidy effect adjusted. Thus, the standard conversion is factor cost = market price − net indirect taxes; NIT has no necessary relation to NFIA.

Correct answer: A. Import of service

Explanation: The expenditure method adds expenditure on final goods and services but subtracts imports because imports are included in domestic spending without being produced domestically. A consultancy supplied by a foreign provider is produced outside the domestic economic territory, even when the client is a domestic government institution. It is therefore recorded as an import of services and deducted through the net-export adjustment. It is not an export, depreciation, or domestic capital formation merely because the government paid for it.

Correct answer: A. Grant can be transfer while purchase of goods can be final expenditure

Explanation: A government grant is generally a transfer payment: the recipient receives funds without supplying a currently produced good or service directly in return. It is therefore not itself counted as payment for current output in the expenditure approach. By contrast, when the government purchases newly produced goods or services, it receives actual output, and that spending is recorded as government final consumption or, when appropriate, investment. The classification depends on the nature of the transaction.

Correct answer: A. Household purchase can be (PFCE) and hotel purchase can be (GCF)

Explanation: The classification of a good depends on its economic use, not simply on its physical identity. A household normally buys furniture for final personal consumption, so the expenditure is recorded as private final consumption expenditure (PFCE). A hotel uses furniture repeatedly in providing accommodation services; the furniture can therefore be treated as a produced fixed asset and recorded as gross capital formation (GCF), subject to the relevant accounting rules. Neither transaction is automatically an import or financial investment.

Correct answer: A. Keep intermediate expenditure, transfer payments and financial transactions separate — मध्यवर्ती व्यय, हस्तांतरण भुगतान और वित्तीय लेन-देन को अलग रखना

Explanation: The expenditure method measures spending on currently produced final goods and services. Intermediate goods must be excluded to prevent double counting, while transfer payments and purely financial transactions do not represent payment for current production. Imports must also be subtracted appropriately. Therefore, separating these items is the essential precaution.

Correct answer: B. 3600 crore

Explanation: The expenditure formula is GDP = C + I + G + (X − M). First calculate net exports: X − M = 500 − 300 = 200 crore. Then GDP = 2000 + 800 + 600 + 200 = 3600 crore. Therefore, option B is correct. Imports must be subtracted because GDP measures domestic production, and imported goods were produced outside the domestic economy.

Correct answer: A. Because imports are not domestic production

Explanation: The expenditure method is expressed as GDP = C + I + G + (X − M). Consumption, investment, and government spending may include expenditure on imported goods, even though those goods were produced abroad. Imports are therefore subtracted to remove foreign production and leave only expenditure corresponding to domestic output.

Correct answer: A. Expenditure method

Explanation: The expenditure method measures GDP by adding spending on final goods and services: consumption, investment, government final consumption expenditure, and net exports. Government purchases of currently produced final goods and services are represented by G. Transfer payments are excluded because they are not payments for current production.

Correct answer: A. Expenditure on teacher service in a government school

Explanation: Payment for the current services of teachers in a government school is government final consumption expenditure because the government is purchasing a current final service for public use. A scholarship is a transfer payment, resale of an old building is not current production, and remittance from abroad is an international transfer rather than government consumption expenditure.

Correct answer: A. They are not part of domestic production

Explanation: GDP measures the value of goods and services produced within the domestic territory. Imported goods may be purchased by households, firms, or the government and may therefore be included initially in consumption, investment, or government spending. They are subtracted as M so that foreign production is removed and only domestic production remains in GDP.

Correct answer: A. It appears in investment, but imports are deducted to correct domestic GDP

Explanation: In the expenditure approach, a machine purchased by a domestic firm is recorded as investment expenditure. If the machine was imported, its value is also included in imports, which are subtracted in the identity GDP = C + I + G + X − M. This prevents foreign production from being counted as domestic GDP.

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

Explanation: The expenditure method measures GDP by adding private final consumption expenditure (C), investment expenditure (I), government final consumption expenditure (G), and net exports. Net exports equal exports minus imports, written as X − M. Exports represent domestically produced output sold abroad, while imports are deducted because they are produced outside the domestic economy.

Correct answer: A. Government final capital formation

Explanation: A newly built bridge is a produced fixed asset that provides transport services for many years. Government spending on its construction is therefore recorded as government investment or government final capital formation in GDP. It is not a transfer payment because the expenditure creates an asset and current production; nor is it private consumption or income from abroad.

Correct answer: A. (GDP_MP)

Explanation: Under the expenditure approach, GDP at market price is calculated as C + I + G + (X − M), where C is household consumption, I is investment, G is government final expenditure, and X − M is net exports. The market-price result includes the effect of product taxes and subsidies. It is not GDP at factor cost or NDP at factor cost.

Correct answer: A. Because they are not domestic production

Explanation: Imports are subtracted because household, business, or government expenditure may include goods and services produced in other countries. GDP is intended to measure domestic production, so the foreign-produced portion must be removed from total expenditure. This is expressed as net exports, X − M, in the expenditure formula GDP = C + I + G + (X − M).

Correct answer: C. GDP will rise

Explanation: Under the expenditure method, GDP is measured as C + I + G + (X − M). In a closed economy, exports and imports are absent, so the relevant expression is C + I + G. Government final consumption expenditure is part of G. If it rises while consumption, investment, and other relevant components remain constant, total expenditure on domestically produced final goods and services increases by the same amount. Therefore GDP rises, making option C correct.

Correct answer: B. It will have a negative effect on GDP

Explanation: Under the expenditure approach, GDP is calculated as C + I + G + (X − M), where X is exports and M is imports. If exports remain unchanged but imports increase, net exports (X − M) decrease. Holding other components constant, this reduces the expenditure measure of domestic output and therefore has a negative effect on GDP. Imports are subtracted because they are not domestically produced.

Correct answer: B. Inventory investment

Explanation: Under the expenditure method, GDP includes expenditure on final goods and services produced during the current period. When finished goods are produced but remain unsold, they are treated as an addition to inventories, also called stock investment. This records current production even though households or firms have not yet purchased the goods. Hence, option B is correct.