Measuring National Income: The Expenditure Method

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)