#EXPENDITURE METHOD OF CALCULATING #NATIONAL INCOME

•    EXPENDITURE METHOD

•    ( MEASUREMENT OF NATIONAL INCOME)

•    DR SHASHI AGAGRWAL

•    MEANING

1.       METHOD WHICH MEASURE THE FINAL EXPENDITURE ON GROSS DOMESTIC PRODUCT AT MARKET PRICE DURING AN ACCOUNTING YEAR. ALSO CALLED INCOME DISPOSAL METHOD OR CONSUMPTION INVESTMENT METHODS.

2.       ACCORDING TO THIS METHOD,NATIONAL INCOME IS ESTIMATED IN TERMS OF EXPENDITURE ON THE PURCHASE OF FINAL GOODS AND SERVICES PRODUCED IN THE ECONOMY DURING AN ACCOUNTING YEAR

3.       FINAL EXPENDITURE COMPRISE CONSUMPTION AND  INVESTMENT METHOD OR INCOME DISPOSAL METHOD

4.       EXPENDITURE METHOD

5.       ESTIMATION OF EXPENDITURE ON THE FINAL GOODS PRODUCED DURING THE YEAR ( WITH IN DOMESTIC TERRITORY OF A COUNTRY) IS EQUAL TO THE MARKET VALUE OF GDP AND ADJUSTED TO FIND NET NATIONAL INCOME AT FACTOR COST.

•    CLASSIFICATION OF FINAL EXPENDITURE

1.       PRIVATE FINAL CONSUMPTION EXPENDITURE ( C)

2.       GOVERNMENT FINAL CONSUMPTION EXPENDITURE ( G)

3.       INVESTMENT EXPENDITURE ( I)

4.       NET EXPORT (X-M)

•    PRIVATE FINAL CONSUMPTION EXPENDITURE (C)

•              PRIVATE FINAL CONSUMPTION EXPENDITURE:-

1.       VOLUME OF FINAL SALE OF DURABLE GOODS,SEMI DURABLE GOODS,NON DURABLE GOODS AND SERVICES TO CONSUMER HOUSEHOLD AND NON PROFIT INSTITUTIONS MULTIPLIED BY RETAIL PRICES.

2.       DIRECT PURCHASE BY NON RESIDENT IN DOMESTIC PURCHASE IS DEDUCTED

3.       DIRECT PURCHASE OF RESIDENT ABROAD ARE ADDED

4.       SELF CONSUMPTION IS ALSO TAKEN INTO ACCOUNT

•    GOVERNMENT FINAL CONSUMPTION EXPENDITURE

•    REFERS TO EXPENDITURE ON FINAL GOODS AND SERVICES  BY THE GOVERNMENT LIKE EXPENDITURE ON THE PURCHASE OF GOODS FOR CONSUMPTION BY THE DEFENCE PERSONNEL

•    INVESTMENT EXPENDITURE (I)

1.       REFERS TO THE PURCHASE OF FINAL GOODS BY THE PRODUCERS

2.       GOODS ARE TO BE FURTHER USED IN THE PROCESS OF PRODUCTION

3.       EXPENDITURE BY THE FARMERS ON THE PURCHASE OF TRACTORS

•    INVESTMENT EXPENDITURE IS FURTHER CLASSIFIED AS UNDER :

1.       FIXED INVESTMENT

2.       INVENTORY INVESTMENT

·         FIXED INVESTMENTS

•    REFERS TO  EXPENDITURE BY THE PRODUCERS ON THE PURCHASE OF FIXED ASSETS LIKE PLANT AND MACHINERY

•    FIXED INVESTMENT :

1.       BUSINESS  FIXED INVESTMENT

2.       FIXED INVESTMENT BY THE HOUSE HOLD IN TERMS OF CONSTRUCTION OF HOUSES

3.       PUBLIC FIXED INVESTMENT OR FIXED INVESTMENTS BY THE GOVERNMENT ( ROADS,DAMS AND BRIDGES)

•    INVENTORY INVESTMENT

1.       REFERS TO CHANGE IN STOCK DURING THE YEAR

2.       MEASURED AS THE DIFFERENCE BETWEEN CLOSING STOCK OF THE YEAR AND OPENING STOCK OF THE YEAR

•    THE STOCK INCLUDES :

1.       STOCK OF FINISHED GOODS

2.       STOCK OF SEMI FINISHED GOODS

3.       STOCK OF RAW MATERIALS

·         NET EXPORT (X-M)

1.       NET EXPORT REFERS TO THE DIFFERENCE BETWEEN

2.       EXPORT AND IMPORT DURING AN ACCOUNTING YEAR

•    EXPORTS ARE AN EXPENDITURE BY THE FOREIGNERS ON THE DOMESTICALLY PRODUCED GOODS AND SERVICES

•    WHILE IMPORTS ARE EXPENDITURE ON THE GOODS AND SERVICES ABROAD

•    EXPORTS ARE INCLUDED IN THE GDP BECAUSE EXPORTS ARE A PART OF DOMESTICALLY PRODUCED GOODS AND SERVICES OR BECAUSE EXPORTS ARE A PART OF GOODS PRODUCED WITH IN THE DOMESTIC TERRITORY OF A COUNTRY.

•    GDP AT MARKET PRICE (GDP_MP )

•    PRIVATE FINAL CONSUMPTION EXPENDITURE PLUS

•    GOVERNMENT FINAL CONSUMPTION EXPENDITURE

•    PLUS GROSS DOMESTIC FIXED INVESTMENT( BUSINESS FIXED INVESTMENT+GOVERNMENT FIXED INVESTMENT + INVESTMENT ON RESIDENTIAL CONSTRUCTION BY HOUSEHOLDS+INVENTORY INVESTMENT) + NET EXPORT (X-M)= GDP AT MARKET PRICE

•    EXPENDITURE METHOD

•    GDP AT MARKET PRICES =

•                PRIVATE FINAL CONSUMPTION EXPENDITURE

•                + GOVT FINAL CONSUMPTION EXPENDITURE

•                GROSS DOMESTIC FIXED CAPITAL FORMATION + CHANGE IN STOCK

•                + NET EXPORT

•    NNP AT FACTOR COST

1.       GDP_MP –DEPRECIATION= NDP_MP  

2.       NDP_MP – DEPRECIATION= NDP_FC ( DOMESTIC INCOME)

3.       NDP_FC + NET FACTOR EARNED FROM ABROAD

4.       NNP_FC  ( NATIONAL INCOME)

•    PRECAUTION REGARDING EXPENDITURE METHOD

1.       EXPENDITURE ON FINAL GOODS AND SERVICES IS TO BE  TAKEN INTO ACCOUNT TO AVOID DOUBLE COUNTING

2.       EXPENDITURE ON INTERMEDIATE GOODS AND SERVICES MUST BE AVOIDED

3.       EXPENDITURE ON SECOND HAND GOODS IS NOT INCLUDED BECAUSE VALUE OF SECOND HAND GOODS HAS ALREADY BEEN TAKEN INTO ACCOUNT

4.       EXPENDITURE ON SHARES AND BONDS IS NOT TO BE INCLUDED IN TOTAL EXPENDITURE AND AS THESE ARE PAPER CLAIMS AND ARE NOT RELATED TO THE PRODUCTION OF FINAL GOODS AND SERVICES

5.       EXPENDITURE ON TRANSFER PAYMENT BY THE GOVERNMENT LIKE OLD AGE PENSIONS,SCHOLARSHIP IS NOT INCLUDED.THESE ARE TRANSFER PAYMENTS

6.       IMPUTED VALUE OF EXPENDITURE ON SELF CONSUMPTION TAKEN INTO ACCOUNT

7.       IMPUTED RENT OF OWNERS OCCUPIED HOUSES SHOULD BE TAKEN INTO ACCOUNT.

•    EXPORTS

1.       EXPORTS ARE JUST SALES AND YIELD REVENUE NOT INCOME

2.       JUST SALES BECAUSE THEY ARE PURCHASES OF THE REST OF THE WORLD FROM THE DOMESTIC ECONOMY

3.       EXPORTS ARE YIELD REVENUE( RECEIPT FROM SALES)

4.       DO NOT YIELD INCOME

5.       INCOME IS IN THE FORM OF RENT,INTEREST,PROFIT OR WAGES