Question

Explain clearly the expenditure method of estimating national income.

Explain briefly the estimation of national income by expenditure method.

Answer 1

The expenditure method is a common approach used to calculate a country’s national income or Gross Domestic Product (GDP). It works by adding up all the expenditures made on final goods and services within an economy over a specific period, typically one year. This method is based on the principle that the total spending in an economy reflects the total value of goods and services produced.

• Private Final Consumption Expenditure (PFCE): This includes household spending on goods and services such as food, clothing, transport, healthcare, and recreation.
• Government Final Consumption Expenditure (GFCE): It represents the government's expenditure on public services like education, law enforcement, health services, and infrastructure.
• Gross Domestic Capital Formation (GDCF): Refers to investments made in capital goods such as buildings, machinery, and equipment. It also includes investment in residential housing and changes in inventories.
• Net Exports (Exports - Imports) (X – M): The difference between a country’s total exports and imports. Exports add to national income, while imports are subtracted since they represent spending on foreign goods.

Formula for Expenditure Method:

GDP (Market Prices) = PFCE + GFCE + GDCF + (X − M) − Depreciation − Net Indirect Taxes + Net Factor Income from Abroad