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Expenditure Method

Expenditure method is also called Flow-of-Expenditure method. Consumption and Investment method, Income Disposal method, etc.

Expenditure method measures the final expenditure on gross domestic product at market prices during a year.

This method measures the expenditure on GDP( ) during a year.
The various steps involved in the use of expenditure method are briefly summarized as follows:

•    First Step: It involves identification of economic units incurring final expenditure
     Different economic units are:
-    Household sector
-    Producer sector
-    Government sector
-    Rest-of-the world sector.

•    Second Step : It involves classification of final expenditure into the following categories:
-    Final Consumption Expenditure:
    (a)    private final consumption expenditure, and
    (b)    final consumption expenditure of the government
-    Final Investment Expenditure:
    (a)    gross domestic fixed capital formation.
    (b)    Changes in stocks, and
    (c)    net acquisition of valuables.
-    Net exports:
Exports minus imports

•    Third Step : It involves the measurement of final expenditure. The various components of final expenditure are measured as follows:

-    To measure Private Final Consumption Expenditure, the volume of final sale of durable goods, semi-durable goods, non-durable goods and services to the consumer households and non-profit institutions serving households is multiplied by market prices (retail prices). The direct purchases of resident households made abroad are added. The direct purchases of non-resident households in the domestic market are deducted, i.e.,

Private Final Consumption Expenditure = (Volume of final sales x Retail price) + Direct purchases abroad by resident household- Direct purchases of non-resident households in domestic market.
Government Final Consumption Expenditure = Volume of sales to the government by the enterprises x Retail prices + Compensation of employs + Purchases from abroad.

-    Gross fixed capital formation involves the estimation of:

(i)    Expenditure on construction (the volume of material inputs and labour is multiplied by the price paid by the builders).

(ii)    Final expenditure on machinery and equipment (the volume of their final sales is multiplied by the market prices).

(iii)    Expenditure on change in stock (the volume or physical change in stocks is multiplied by market prices).
-    Net exports (i.e.., Exports – Imports).

Thus, according to the expenditure method GDPMP = Private final consumption expenditure + Government Final Consumption Expenditure + Gross Domestic Investment + Net Exports.

From the estimates of GDPMP, other income aggregates can be derived.

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