*DAY #11 & 12 06 & 07.04.2020*
*TOPIC – NATIONAL INCOME CALCULATION*
*EXPENDITURE METHOD *
EXPENDITURE METHOD FOR
MEASURING NATIONAL INCOME-
This method arrives at national income by adding up all
the expenditure made on goods and services during a year. Thus, the national
income is found by adding up the following types of expenditure by households,
private business enterprises and the government: -
1. Private Final Consumption Expenditure (PFCE)(C):
It
refers to expenditure incurred by households and private non-profit
institutions serving households on all types of consumer goods, i.e. durable
(except houses), semi-durable, non-durable goods and services. It includes
expenditure on food, medical treatment, travelling, insurance premium etc. Expenditure
on consumer goods and services by individuals and households denoted by C. This
is called Private Final Consumption Expenditure, denoted by C.
PFCE
= Household Final Consumption Expenditure + Private Non-Profit Institutions
Serving Households Final Consumption Expenditure
2. Government Final Consumption Expenditure
(GFCE)(G):
It refers to the expenditure incurred by
general government on various administrative services like defense, law and
order, education (books, mid day meal, dresses, bags, chalks etc.), health
services (purchase of dresses, bed sheets, medicines, vaccines etc.).
Government produces goods and services with the aim of social welfare without
any intention of earning profits. Government’s expenditure on goods and
services i.e. Government Final Consumption Expenditure, denoted by G.
3. Gross Domestic Capital Formation (GDCF)
or Gross Investment (I):
A
measures to the total investment. ‘Gross’ indicates that it is measured without
subtracting allowance for capital consumption. ‘Domestic’ that it refers to
investment in the country regardless of ownership. It thus includes investment
in the country by companies owned by ‘non’ residents and excludes investment
abroad by resident firms.
In
other words, It represents the expenditure incurred on acquiring goods for
investment by the production units located within the domestic territory. Expenditure
by private business enterprises on capital goods and on making additions to
inventories or stocks in a year. This is denoted by I.
There
are two components of GDCF:
(i)
Gross Fixed Capital Formation:
It
refers to the expenditure incurred on purchase of fixed assets. It includes (1)
Gross Business Fixed Investment: Expenditure on the purchase of new plants, machinery,
equipment’s, etc. (2) Gross Residential Construction Investment: Expenditure on purchase or construction
of new houses by the households. (3) Gross Public Investment: Expenditure on construction of
flyovers, roads, bridges etc. by the government.
(ii)
Inventory Investment (Change in Stock):
It
refers to the physical change in the stock of raw material, semi-finished goods
and finished goods lying, with the producers. It is included as an investment
item because it represents the goods produced but not used for current
consumption. It is calculated as the difference between the closing stock and the
opening stock of the year. It means,
GDCF
= Gross Fixed Capital Formation + Inventory Investment; or
Gross
Fixed Capital Formation GFCF = Gross Business Fixed
Investment + Gross Residential Construction Investment + Gross Public
Investment
It
is important to understand that purchase of shares and debentures, either old
or new, is not included in investment. For example, if I have purchased 500
shares of Reliance Industries, it may be an investment from my point of view,
but for economy, it is simply a transfer of purchasing power and not an
investment.
4. Net Exports (X – M):
It refers to the difference between exports and imports
of a country during a period of one year.
1.
Exports (X) refer to expenditure by foreigners on purchase of domestic products.
The exported goods have been produced within the country’s domestic territory
So; they are included in output of an economy.
2.
Imports (M) is the expenditure by residents on foreign products. Imports are
deducted to obtain domestic product as they are not produced within the
domestic territory.
3.
Instead of treating exports and imports separately, the difference between the
two is taken and is termed as Net Exports.
4.
Import includes expenditures incurred by normal residents, whether in the domestic
territory or abroad. So, any expenditure incurred by residents during their
foreign tour/travel will be added in Imports. However, any expenditure incurred
by non-residents and foreign visitors in the domestic market will be included
in exports.
GDPmp = C + I + G + (X – M).
Private Final Consumption Expenditure
+ Government Final Consumption Expenditure
+ Gross Domestic Capital Formation
+ Net Export
= Gross Domestic Product at Market Price (GDPMP)
(-) Depreciation
= Net Domestic Product at Market Price (NDPMP)
(-) Net Indirect Tax
= Net Domestic Product at Factor Price (NDPFC)
(+) Net factor Income from Abroad
= Net National Product at Factor Price (NNPFC)
PFCE – Consumption Expenditure by House Hold
GFCE – Consumption Expenditure by Govt.
GDCF = Net Domestic Capital Formation + Depreciation
GDCF = Net Domestic Fixed Capital Formation + Change in Stock
+ Depreciation
GDCF = Gross Domestic Fixed Capital Formation + Change in
Stock
Net Export = Export – Imports
STEPS
OF EXPENDITURE METHOD:
Step
1: Identify the Economic Units incurring Final Expenditure - All
the economic units, which incur final expenditure within the domestic
territory, are classified under 4 groups: (i) Household sector; (ii) Government
sector; (iii) Firm (Producing) sector; (iv) Rest of the world sector (Abroad).
Step
2: Classification of Final Expenditure - Final expenditures incurred by
the above mentioned economic units are estimated and classified as (1)
Private Final Consumption Expenditure (PFCE); (2) Government Final Consumption
Expenditure (GFCE); (3) Gross Domestic Capital Formation (GDCF); (4) Net
.Exports (X-M).
The
sum total of four components of final expenditure gives Gross Domestic Product
at Market Price (GDPmp), i.e. GDPmp = PFCE + GFCE + GDCF + (X-M)
Step
3: Calculate Net Domestic Income at Market Price
(NDPmp)
- By subtracting the amount of depreciation from GDPmp, we
get Net Domestic Income, i.e. NDPmp = GDPmp – Depreciation.
Step
4: Estimates Net domestic Income at Factor Cost (NDPfc) -
By subtracting the amount of net indirect taxes from NDPfc, we get Net Domestic
Income at factor cost, i.e. NDPfc = NDPmp – Net Indirect Taxes.
Step
5: Estimate Net National Product at Factor Cost / National Income - By
adding the amount of Net Factor Income from Abroad /
subtracting the amount of Net Factor income Paid to abroad from NDPfc, we get Net National Product at Factor Cost / National Income i.e.
NNPfc = NDPfc + Net Factor Income from Abroad / NDPfc – Net factor income paid
to abraod
STEPS IN SHORT-
(1) Identify the Economic units incurring Final
Expenditure
(2) Classification of Final Expenditure (PFCE + GFCE +
GDCF + Net Export = GDPMP)
(3) Calculate Domestic Income (NDPFC) = NDPFC
= GDPMP – Depreciation – Net Indirect Tax.
(4) Estimate net factor income from abroad (NFIY) to
arrive at National Income. NNPFC = NDPFC + NFIA.
PRECAUTIONS
OF EXPENDITURE METHOD:
The
various precautions to be taken while using the Expenditure Method are:
1.
Expenditure on Intermediate Goods will not be included in the national income
as it is already included in the value of final expenditure. If it is included
again, it will lead to double counting of expenditures.
2. Transfer
Payments are not included as such payments are not connected with any
productive activity and there is no value addition.
3.
Purchase of second-hand goods will not be included as such expenditure has
already been included when they were originally purchased. Such goods do not
affect the current flow of goods and services. However, any commission or
brokerage on such goods is included as it is a payment made for productive
service.
4.
Purchase of financial assets (shares, debentures, bonds etc.) will not be
included as such transactions do not contribute to current flow of goods and
services. These financial assets are mere paper claims and involve a change of
title only. However, any commission or brokerage on such financial assets is
included as it is a productive service.
5.
Expenditure on own account production (like production for self-consumption,
imputed value of owner occupied houses, free services from general government
and private non-profit making institutions serving households) will be included
in the national income since these are productive services
PRECAUTIONS IN SHORT-
(1) Expenditure on Intermediate Goods will not be
included in the National Income.
(2)Transfer payments are not included.
(3) Purchase of second hand goods will not be included.
(4) Purchase of financial assets (shares, debentures,
Bonds) will not be included.
(5) Expenditure on own account production will be
included in the National Income.
NUMERICALS -
1. Calculate National Income by Income Method from the
following Data:
1. Govt. final consumption
expenditure 100
2. Subsidies 10
3. Rent 200
4. Wages and Salaries 600
5. Indirect taxes 60
6. Private final Consumption
expenditure 800
7. Gross Domestic Capital formation 120
8. Social Security
contribution by employers 55
9. Royalty 25
10.
Net factor income paid to abroad 30
11.
Interest 20
12.
Consumption of fixed capital 10
13.
Profit 130
14.
Net Exports 70
SOLUTION -
National Income by Expenditure Method=
GDPmp = Private Final Consumption Expenditure + Government
Final Consumption Expenditure + Gross Domestic Capital Formation + Net Export
= 800 + 100 + 120 +
70
= 1090
NDPmp = GDPmp - Depreciation
=
1090 – 10
=
1080
NNPmp = NDPmp - Net Factor Income paid to Abroad
= 1080 - 30
NNPmp = 1050
NNPfc = NNPmp – Net Indirect Tax
= 1050 –
(60 – 10) (Indirect
Tax – Subsidy)
= 1050 –
50
NNPfc = 1000
2. From the following data calculate Gross National
Product at factor cost by Income method.
S.N
|
Items
|
Rs. in Crores
|
1.
|
Net domestic capital
formation
|
500
|
2.
|
Compensation of employees.
|
1850
|
3.
|
Consumption of fixed capital
|
100
|
4.
|
Govt. final consumption
expenditure
|
1100
|
5.
|
Private final consumption
expenditure
|
2600
|
6.
|
Rent
|
400
|
7.
|
Dividend
|
200
|
8.
|
Interest
|
500
|
9.
|
Net export
|
-100
|
10.
|
Profit
|
1100
|
11.
|
Net factor income from
abroad
|
-50
|
12.
|
Net indirect taxes.
|
250
|
SOLUTION -
National Income by Expenditure Method=
GDPmp = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Capital Formation +
Net Export
= 2600 + 1100 +
(500 + 100) + (-100)
= 3700 + 600 – 100 (Net
Domestic Capital Formation + Depreciation)
= 4300 – 100
= 4200
NDPmp = GDPmp - Depreciation
=
4200 – 100
=
4100
NNPmp = NDPmp + Net Factor Income from Abroad
= 4100 + (-50)
NNPmp = 4050
NNPfc = NNPmp – Net Indirect Tax
= 4050 – 250 (Indirect
Tax – Subsidy)
= 3800
NNPfc = 3800
3. Calculate National income by Income method.
S.N.
|
Items
|
Rs.
|
1
|
Subsidies
|
5
|
2
|
Private final consumption expenditure
|
100
|
3
|
NFIA
|
-10
|
4.
|
Indirect Tax
|
25
|
5
|
Rent
|
5
|
6
|
Government final consumption expenditure
|
20
|
7
|
Net domestic fixed capital formation
|
30
|
8
|
Rent, interest, profit
|
20
|
9
|
Wages
|
50
|
10
|
Net export
|
-5
|
11
|
Addition to stock
|
-5
|
12
|
Social security contribution by employers
|
10
|
13
|
Mixed income of self employed
|
40
|
SOLUTION -
National Income by Expenditure Method=
GDPmp = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Capital Formation +
Net Export
= 100 + 20 + (30 +
(-5) ) + (-5)
= 120 + (30-5) – 5 (Net Domestic Capital Formation + Depreciation)
= 120 + 25 – 5
= 145 – 5
= 140
NDPmp = GDPmp - Depreciation
=
140 – 0
=
140
NNPmp = NDPmp + Net Factor Income from Abroad
= 140 + (-10)
= 140 - 10
NNPmp = 130
NNPfc = NNPmp – Net Indirect Tax
= 130 –
(25-5) (Indirect
Tax – Subsidy)
= 130 - 20
NNPfc = 110
4. Calculate national income by income and expenditure
method from the following data:
Sl no.
|
Items
|
Rs. Crores
|
i)
|
Private final consumption expenditure
|
1400
|
ii)
|
Mixed income
|
140
|
iii)
|
Gross Domestic fixed capital formation
|
280
|
iv)
|
Opening stock
|
60
|
v)
|
Compensation of employees
|
1000
|
vi)
|
Closing stock
|
100
|
vii)
|
Government final consumption expenditure
|
400
|
viii)
|
Operating surplus
|
800
|
ix)
|
Consumption of fixed capital
|
40
|
x)
|
Net factor income from abroad
|
-20
|
xi)
|
Exports
|
40
|
xii)
|
Imports
|
80
|
xiii)
|
Net Indirect Tax
|
100
|
SOLUTION -
National Income by Expenditure Method=
GDPmp = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Capital Formation
(Gross domestic Fixed Capital Formation + (Closing Stock – Opening Stock) + Net
Export (Export – Import)
= 1400 + 400 + (280
+ (100-60) ) + (40-80)
= 1800 + (280 + 40) + (-40)
= 1800 + 320 – 40
= 2120
– 40
GDPPmp = 2080
NDPmp = GDPmp - Depreciation
=
2080 –40
= 2040
NNPmp = NDPmp + Net Factor Income from Abroad
= 2040 + (-20)
= 2040 - 20
NNPmp = 2020
NNPfc = NNPmp – Net Indirect Tax
= 2020 – 100
= 1920
NNPfc = 1920
Video #13
National Income Calculation - EXPENDITURE METHOD
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Regards
Dr. Asad Ahmad
KV IIM, Lucknow
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