Expenditure Method


National income can also be measured at disposition phase with the help of expenditure method. It estimates national income by measuring final expenditure on gross domestic product at market price ( GDPMP ).

Expenditure incurred on final goods is final expenditure. Final goods are those goods which are demanded for final consumption and investment. The demand for final consumption and investment is made by all the four sectors of the economy, namely, households, firms and the government and rest of the world.

The main steps involved in measuring national income by this method are –

First : Estimate the following expenditure incurred on the final products of all the sectors of the economy.

  • (i) Private final consumption expenditure
  • (ii) Government final consumption expenditure
  • (iii) Gross Investment
  • (iv) Net exports (exports – imports)

The sum total of all the above expenditures on final products of all the sectors of the economy gives us gross domestic product at market price ( GDPMP ).

Second : Deduct consumption of fixed capital (Depreciation) and net indirect taxes from gross domestic product at market price ( GDPMP ) to get net domestic product at factor cost ( NDPFC ).

NDPFC = GDPMP
Consumption of fixed capital
Net Indirect Tax (Indirect Taxes – Subsidies)

Third : Add net factor income from abroad to the net domestic product at factor cost ( NDPFC ) to obtain net national product at factor cost ( NNPFC ) which is the national income.

NNPFC = NDPFC
+ Net Factor Income from abroad (National Income)

229

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Precautions : The main precautions required to be taken in estimating national income by expenditure method are –

  • (i) Expenditure on intermediate products should not he included to avoid the problem of double counting.
  • (ii) Expenditure on gifts, donations, taxes, scholarships etc. should not be included in National Income as these are transfer payments.
  • (iii) Expenditure incurred on purchase of second-hand goods should not be included as the expenditure on these goods has already been included when bought for the first time.
  • (iv) Expenditure on purchase of bonds and shares should not be included as these are financial transactions.

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Bibliography : NIOS – Economics

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