Expenditure Method Definition in Economics

  Expenditure Methos

To calculate public income by expenditure system, the frugality is divided into four major sectors ménage, government, business, and foreign. These are the major requests for the affair of frugality. At one time, the total expenditures of these sectors on final affairs constitute the nation’s GDP at MP. GDP at MP is, thus, the sum of total final expenditures made by homes, government, business, and foreign sectors.

Expenditure Method Definition in Economics
Expenditure Method Definition in Economics

The expenditure method measures public income as the aggregate of all final expenditure on the gross domestic product in a frugality during a time. Final expenditure means expenditure on the final product. The total income generated in the frugality is spent either on consumer goods or capital goods. According to the expenditure system, the sum of private consumption expenditure, private investment expenditure, government expenditure, and net import gives the GDP account at the requested price.


 Net import equals total exports n • minus total significances. These both are part of the GDP. Gross exports are the presently produced goods and services that are vented to foreign buyers. significances are purchases by domestic buyers of goods and services produced abroad and should be subtracted from GDP. The expenditure on imported goods and services is included in the consumption, investment, and government expenditure. thus, we need to abate the value of significance to gain the value of domestically produced goods and services. therefore, we add up the below four types of expenditures to get the final expenditures on the gross domestic product at the requested prices. When net factor income from abroad is added up to GDP at MP, GNP at MP is attained. GNP at MP is converted to NNP at MP by abating deprecation. At the last, NNP at MP is converted to NNP at factor cost by abating net circular levies. NNP at factor cost is the public income.


The factors of public income in this system are as follows :


 1. particular consumption expenditures

It’s constantly appertained to as consumption expenditures or simply consumption. This element consists of expenditures on consumer goods and services. Some exemplifications are particular consumption expenditures are food, apparel, appliances, motorcars, medical care, and recreation.


 2. Government expenditure-

 The particulars in this element are bought by all situations of government. They include government expenditures on security, administration, structure development, etc. still, but the transfer payments which are a significant part of government expenditures are neglected because they don’t represent part of the current affair of goods and services.

 3. Gross private domestic investment-

 This element includes total investment spending by business enterprises. Investment has a special meaning in economics. In everyday language, a person makes an investment when buying stocks, bonds, or other means with the intention of entering an income or making a profit. In economics, investment means additions to or relief of physical productive means. therefore, the investment represents spending on business goods. Because similar expenditures contribute significantly to GDP, they’re of major concern in economics.


Gross private domestic investment( I) = Net fixed capital conformation Depreciation Change in the stock

Change in stock( Change in supplies) = ending stock — Opening stock

4. Net exports of goods and services

 Some domestic expenditure is made to buy foreign goods and services which is known as significance. On the other hand, some foreign expenditure is made to buy domestic goods and services which is known as the import. To measure GDP at MP in terms of total expenditures, we must include the value of exported goods and services( because the value of exported represents the quantum that foreign buyers spend on copping

 some of our total affairs). also, we abate the value of imported goods and services from our total expenditures(because the part of our consumption was for imported goods, and we’re interested only in measuring the value of domestic affairs). Hence, net exports are equal to total exports and lower total significance.


 Net import = Import — Import

 5. Net circular levies-

 Net circular duty is equal to circular levies and smaller subventions. The circular duty consists primarily of deals or value-added duty (Handbasket), excise, and real property levies incurred by businesses. It’s considered a business expenditure — the same as stipend and other costs. Though the final burden of similar levies is borne by the final consumer in the form of advanced prices, it’s included in GDP. This is because the circular levies beget the expenditure side of GDP to be lesser than the income side. On the other hand, subventions beget the expenditure side to be lower- than the income side. thus, circular levies are subtracted and subventions are added to get GDP at factor cost.

Net circular levies = circular levies — subventions


 6. Net factor income from abroad

 The net factor income from abroad is included in the public income. Net income from abroad is equal to income entered by citizens of a country from abroad and lower-income paid to the nonnatives. It’s added to GDP to get GNP.


 7. deprecation

 The deprecation quantum is subtracted from the gross public product (GNP) to get the net public product (NNP). deprecation is the wear and tear and gash of fixed means and ministry. It’s also known as capital consumption.

The computation of public income by expenditure system involves the following way


 GDP at MP(GDPMP) = C 1 G(X- M)

GNP at MP(GNPMR) = GDP at MP Net factor income from abroad


 NNP at MP( NNPMF) = GNP at MP- Depreciation

NNP at FC( NNPFc) = NNP at MP- Net circular levies

 = NNP at FC



 C = Private consumption expenditure,

 X = Import

I = Private investment expenditure,

 M = Import,

 G = Government expenditure

 X — M = Net import



The use of the expenditure approach to measuring NI requires careful specification of what’s to be included under the title of expenditures. There are certain rejections from expenditures.

ØIt must include only expenditures on the purchase of goods and services produced during a specified period. It must exclude expenditures on previously produced goods. All expenditures of this kind merely reflect changes in the ownership of preexisting output such as they are not part of the total expenditures that measure the value of current output.

ØIt must also exclude all expenditures for the purchase of used assets. They merely exchange money assets for physical assets; they are not the part of current year’s production.

ØIt must exclude the purchase of financial assets such as stock and bonds there is no production of goods or services corresponding to expenditures for mere pieces of paper.

ØIt must also exclude transfer payment i.e., expenditures by the government for which the government does not receive a good or service in exchange. Such expenditure does not reflect the output of goods and services.

ØExpenditures on intermediate goods, such as fertilizers and seeds by farmers, should be excluded. This is because we have to avoid double counting. Hence, for estimating GDP, we must include only the expenditures on final goods and services.

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