Methods of Measurement of National Income - Expenditure Method

• The Expenditure Method, also known as the Outlay Method or Consumption and Investment Method.
• National income is estimated by adding all final expenditures incurred in the economy during a year.
• Only final expenditures are included - intermediate expenditures are excluded to avoid double counting.

GDPMP = C + I + G + (X − M)

Where:

• C = Private Final Consumption Expenditure
• I = Gross Domestic Investment Expenditure
• G = Government Final Consumption and Investment Expenditure
• X − M = Net Exports (Exports − Imports)

NNPFC = GDPMP − Depreciation − Net Indirect Taxes + NFIA

Where:

• Depreciation = Consumption of Fixed Capital
• Net Indirect Taxes (NIT) = Indirect Taxes − Subsidies
• NFIA = Net Factor Income from Abroad

OR (Direct Formula)

NI = C + I + G + (X − M) + (R − P)

Where:

• R − P (NFIA) = Net Receipts/Net Factor Income from Abroad

1. Private Final Consumption Expenditure (C)

Expenditure by households and private institutions on:

• Non-durable goods (food, etc.)
• Durable goods (car, TV, computer, etc.)
• Services (transport, education, medical, etc.)

2. Gross Domestic Investment Expenditure (I)

Expenditure on capital goods and addition to productive capacity, including:

• Gross Fixed Investment (plant, machinery, buildings, etc.)
• Change in Inventories (Closing Stock − Opening Stock)
• Residential Investment (new houses and major renovations)

3. Government Final Consumption and Investment Expenditure (G)

• Government consumption on administration, defence, health, education, law and order, etc.
• Government investment on infrastructure such as roads, railways, bridges, dams and canals.
• Government services are valued at cost as they generally have no market price.

4. Net Exports (X − M)

Difference between exports and imports.

• Exports are added because they represent foreign spending on domestic goods.
• Imports are deducted because they are produced outside the domestic economy.

5. Net Factor Income from Abroad (NFIA / R − P)

Difference between factor income/receipts earned from abroad and payments made abroad. It converts domestic income into national income.

1. Identify the sectors incurring expenditure.
2. Classify expenditure into C, I, G, (X − M) and NFIA.
3. Calculate GDPMP = C + I + G + (X − M).
4. Deduct Depreciation and Net Indirect Taxes to obtain NDPFC.
5. Add NFIA to obtain National Income (NNPFC).

• Include only final goods and services; exclude intermediate goods.
• Exclude expenditure on second-hand goods.
• Exclude transfer payments (pensions, scholarships, unemployment allowance, etc.).
• Exclude purchase and sale of financial assets (shares, bonds, debentures).
• Deduct Net Indirect Taxes (Indirect Taxes − Subsidies).
• Include the imputed value of goods produced for self-consumption.

• Difficulty in distinguishing final and intermediate expenditure.
• Difficulty in classifying some government expenditure as consumption or investment.
• Problems in measuring expenditure in the unorganised/informal sector.
• Difficulty in valuing changes in inventories and some consumer durable goods.

• Measures national income from the demand (expenditure) side of the economy.
• Based on the principle that National Income = National Expenditure.
• GDPMP = C + I + G + (X − M) is the basic expenditure equation.
• NNPFC = GDPMP − Depreciation − Net Indirect Taxes + NFIA gives National Income.
• Exports are added and imports are deducted to measure domestic production.
• Only final expenditure is included to avoid double counting.
• In India, national income is mainly estimated using a combination of the Output Method and Income Method, while the Expenditure Method is used less due to practical difficulties.