National Income 4th class

21 July 2022 15:01

National Income Under Expenditure Method

Under this method we measure national income by adding the Final

expenditure made by the Household, Private business Firm ,Govt and
Foreigners

Sum of Expenditure = GDPMP

it is also known as Income Disposable Method , Consumption Method,

Investment Method

Private Final Consumption Expenditure (PFCE) :

Expenditure incurred by household, Pvt firm , NPO serving Household on all
types of consumer goods i.e Durable Non- Durable and Semi Durable goods
and services.

Things to remember

The expenditure made under PFCE must be made by Resident of India

whether expenditure made in India or Out side India

Govt Final Consumption Expenditure (GFCE) : Expenditure Incurred by

General Govt on various Administrative Service like defense , law and Order,
Education . It also includes goods and services produced by the Govt for the
public .

GFCE = Intermediate Consumption +COE + Import - Sale

Gross Domestic Capital Formation (GDCF) Gross Investment : It refers to the

addition in the capital stock of the economy .

GDCF has 2 components :

1) Gross Fixed Capital Formation : Expenditure made on Purchase of Fixed

assets . it has 3 sub categories.

a) Gross Business Fixed Investments( GBFI) : Purchase of Plant Machine

Equipment etc.
b) Gross Residential Construction Expenditure : Construction of House by
Households
c) Gross Public Investment : Expenditure of Flyover, Road , Bridges etc by the
Govt.

2) Inventory Investments (Change in Stocks) : Change In physical stocks

of Raw Material , WIP and Finished Goods with Producer.
change In Inventory = Closing Stock - Opening Stock.

Things to remember

1) Investments in share is not included here .

2) If there is increase in stock of goods lying with consumer it should
Excluded .
3) Purchase of 2nd hand goods are excluded .

Net Export : Difference Between Export and Import.

Export : Expenditure made By foreigner in domestic Goods .

Import : Expenditure made By Residents in Foreign Goods .

 POINTS TO REMEMBER 1.
Services of defense personnel, policemen and judges. These are
treated as final services and thus included in national Income.

2. Imports are not included in the estimation of national income

The goods that have been imported in an economy are available
for use by the residents. But since they have not been produced
within the economy, they do not generate any income for factor
inputs.

3. Exports are included in the estimation of national income (ques:

why is export considered?) The goods that have been exported to
non-residents are not part of private final consumption
expenditure; however, they have been produced in domestic
territory, therefore considered as part of domestic income.

STEPS INVOLVED IN CALCULATING NATIONAL INCOME (EXPENDITURE

METHOD)

STEP1.
Identification of economic units incurring final expenditure Economic units
incurring final expenditure are following:
• Household sector
• Producing sector
• Government sector
• Rest of the world
STEP2.
Classification of final aggregate expenditure into following components.
i). Private final consumption expenditure.
ii). Government final consumption expenditure
iii). Gross domestic capital formation.
iv). Net exports.

STEP3.:
Estimate GDPMP GDP at MP = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Capital
Formation + Net Exports.

STEP4:

Estimation of national income The last step is to estimate or calculate

national income: NNPMP = GDPMP – Depreciation – NIT + N.F.I.A

Precautions Involved in Calculating NI by Expenditure Method

The precautions to be taken while calculating national income by expenditure

method are:

1. Final expenditure is to be included to avoid double counting. Final

expenditure is expenditure on final goods and services.

2. Intermediate expenditure is not included in the calculation of national

income.

3. Expenditure on second hand goods is not included as they have already

been included when they were purchased originally.

4. Expenditure on shares and bonds is not included because they are simple
paper claims. (as they imply only transfer of tittle not goods & services)

5. Gross investment is included in total expenditure. Gross investment

includes replacement investment and net investment.

6. Expenditure on transfer payments by the government is excluded in total

expenditure. However, goods purchased for free distribution is included.