Expenditure method is also known as consumption and investment method. Expenditure method measures national income as the aggregate of all final expenditure on gross domestic product in an economy during a year. According to this method national income is calculated by adding up personal consumption expenditure, Govt, purchases of goods and services, net domestic investment, net foreign investment.
The aggregate of all these expenditures, constitutes gross national product at market price. Final expenditure means expenditure on final products. The total income generated is spent on consumption goods and investment goods. Thus total final expenditure represents expenditure incurred on consumption and investment. Symbolically it’s Y = C+l, when Y stands for final expenditure, Ct for consumption expenditure and f for investment expenditure.
The expenditure method assumes that national income equals national expenditure.
(i) GDP at MP = Gross National expenditure.
Gross national expenditure = Private final consumption expenditure (C) + Govt, final consumption expenditure (G) + Gross domestic private investment (I) + net export or Export Import (X- M)
Thus GDP at MP = Gross national Expenditure = C + 1 + G + (X-M)
Gross national product at market price is calculated
(ii) By adding net factor income from abroad to the gross domestic product at market price.
GNP at MP = GDP at MP + Net factor income from abroad.
(iii) Gross national product at factor cost is arrived at by deducting net indirect taxes from gross national product at market price.
GNP at FC = GNP at MP – Net Indirect taxes.
(iv) Net National product or national income can be derived by deducting depreciation from gross national product at factor cost.
NNP at MP (NI) = GNP at FC – Depreciation.
Components of final expenditure:-
(a) Consumption expenditure:-
Consumption expenditure in a year includes expenditure on single use consumer goods, durable consumer goods and services. Consumption expenditure is of two types – Private consumption expenditure and Public consumption .expenditure. Private consumption expenditure constitutes expenditure made on the single and durable consumer goods. Public consumption expenditure means Govt, expenditure. Govt spends on health, education, railway etc. There goods are provided free of cost.
(b) Investment expenditure;-
The amount of expenditure spent on investment goods like raw materials, machines plants and equipments in a year is called investment expenditure. There investment goods satisfy human wants indirectly. Investment expenditure is classified into (i) changes in stock and (ii) gross domestic capital formation. Changes in stock mean change in stocks of inventories like raw materials; semi finished goods and finished goods. Change in stock = closing stock – Opening stock. Gross domestic capital formation comprises of construction, machinery, and equipment.
(c) Net export:-
Net export is otherwise called net foreign investment. It may be positive and negative.
Precautions in Expenditure method:-
(i) Expenditure on second hand goods is excluded as this expenditure is not made on currently produced goods.
(ii) Government expenditure in form of transfer payments should be excluded as there. Payments do not contribute anything to the production of goods and services.
(iii) Expenditure on intermediate goods should be excluded from national income.
(iv) Expenditure on bonds and securities are excluded from national income.
Difficulties in final expenditure method:-
(1) Consumer durables: – There is a controversy whether expenditure on consumer durables is to be called consumption expenditure and investment expenditure. Durable consumer goods continue for several years. A car when used for enjoyment is called consumer good. On the other hand if it is used for earning income it is called investment good. Therefore it is difficult to measure the value of services rendered by the consumer durables.
(2) It is also difficult to differentiate Govt, consumption expenditure from Govt, investment expenditure. Expenditure on education by the Govt is consumption expenditure where as the expenditure incurred on the construction of roads and dams are called investment expenditure.
(3) Interest on public debt is not included in Govt, expenditure.
(4) It is also difficult to ascertain consumption expenditure of the house holds and investment expenditures of the producers.
(5) There is frequent change in the stock of inventories of the producers. Thus it is impossible to obtain the accurate inventory stocks of the producers.