Calculate the GDP through Expenditure Method. Will you include expenditure on construction of a residential house, and purchase of securities in the GDP?

Prof. Mahendra Kumar Ghadoliya  

This is the most widely used approach for estimating GDP is is a measure of country’s output produced within a country’s border irrespective of the ownership of factors .

The Gross Domestic Product of a country can be estimated by accounting the aggregate expenditure on consumption, investment, government spending  and net export. In this method expenditure on the purchase of goods and services produced during the current year is included and it gives the nominal GDP. Expenditure incurred on the purchase of property reflects changes in the ownership only and are excluded or such expenditures are not a part of the aggregate expenditure on current output. Similarly expenditure on purchase of bonds and stocks from the share market is also excluded or not included. Whether currently issued or not, this expenditure must not be counted as there is no production or output of goods and services. Expenditures by governments for which governments do not receive any good or service in exchange is excluded. From Nominal GDP one can calculate real GDP by adjusting the figure for inflation.

GDP can be calculated through expenditure by taking into account the following:

1.      Private final consumption expenditure

2.      Gross capital formation

3.      Government final consumption expenditure

4.       Net exports of goods and services

Now, let us discuss components of GDP through expenditure method in detail:

1.     Private Final Consumption Expenditure ( C) :

This is the single most important component of GDP. The expenditure made by consumers on purchase of durable goods such as fridge, washing machine, car, AC etc. and non-durable goods and services wheat, vegetables, fruits, milk etc. and services like education, health insurance etc.  From this we deduct the purchases made by non-resident households in the domestic market and add direct purchase made by resident households in foreign market.

2.     Gross Fixed Capital Formation(I):

Another major component of GDP and GNP is  gross fixed capital formation I . This includes the spending by entrepreneurs to sustain and grow their business. Examples of expenditures falling under gross private investment includes: fixed investment in construction of assets (purchase of residential house, factory building,  plant and machinery, business tools, etc.), and changes in inventory levels, etc. inventory investment must be taken into account by calculating the market value of change in stocks. Increase in inventories must be added and decline in inventories must be subtracted from GDP.

However, it excludes a mere transfer of existing assets from one party to another (such as purchase of securities on the stock exchange, purchase of a resold asset, etc.)

3.     Government final consumption expenditure (G):

The final consumption spending of government is denoted by G and this includes the followings: (a) compensation to employees or Employees’ Salary, (b)  purchase of intermediate goods and services by the government; and ( c) purchase of goods and services  from abroad.  A significant part of government spending  is not spent on goods and services it is spent on grants and subsidies and called transfer payments. Such transfer payments do not represent expenditure on purchase of goods and services and therefore, excluded from GDP and GNP figures.

4.       Net exports of goods and services (X-M):

This is the difference between value of exports and value of imports. Value of export is a positive entry while value of imports is a negative entry.  (X − M) equals net exports.  X stands for exports and represents the purchase of goods produced in a region that are consumed by foreigners. M stands for imports and represents the purchase of foreign goods and services. Since GDP sums up all production within geographical boundaries of a region, it must include the output that is purchased by foreigners and exclude the portion of C, I and G that is spent on foreign goods and services.

Formula

he GDP under the expenditures approach is calculated using the following formula:

GDP = C + I + G + (X − M)

After arriving at GDP at market price by expenditure method, net factor income from abroad is added to arrive at GNP.  To conclude we can say that the calculations from these three methods give identical results.  

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