Measuring National Income: The Expenditure Method

Study Notes

The Expenditure Method

Measures the value of all goods and services based on expenditures made by four sectors: household, business, government, and foreign sectors.

Consumption Expenditure (C)

Made by household sector for:
- Consumer durable goods (e.g., cars, houses, electrical appliances)
- Consumer non-durable goods (e.g., clothes, food, toothpaste)
- Consumer services (e.g., medical care, entertainment, auto repairs, haircut)

Gross Private Domestic Investment (I)

Expenditures by business sector on:
- New plant and equipment (capital goods)
- Changes in business inventory (stock of unsold final goods, raw materials, and semi-finished goods)
Inventory remains as part of business expenditures until final goods are sold, raw materials are used.

Depreciation

Reduction in value of fixed assets (e.g., machinery, equipment, vehicles, buildings) due to wear and tear until they become obsolete.

Government Expenditure (G)

Total budget of federal, state, and local governments to finance their activities and functions.
Excludes transfer payments that do not contribute directly to current production of goods and services.
Examples of government spending: infrastructure development, public services (e.g., healthcare, education, defense, social security).

Net Exports (Xn)

Exports: sales of domestically produced goods to foreign sectors.
Imports: purchases by domestic economy from foreign sectors.
Net Exports = Exports (X) - Imports (M).

GDP Calculation

GDP = C + I + G + (X-M)

Description

This quiz covers the Expenditure Method, which calculates the value of goods and services based on expenditures made by four sectors: household, business, government, and foreign sectors. It includes consumption expenditure and gross private domestic investment.