Expenditure methods, Macroeconomics

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Expenditure method is also called Flow-of-Expenditure method, consumption and investment method, income Disposal method, etc.


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

This method measure the expenditure on GDPMP during a year.

The various steps involved in the use of expenditure method are briefly summarized as follows:
    
1. First Step: It involves identification of economic units incurring final expenditure. Different economic units are:

(i) Household sector

(ii) Producer sector

(iii) Government sector

(iv) Rest-of-the world sector.
    
2. Second Step: It involves classification of final expenditure into the following categories:

(i) Final Consumption Expenditure:
    
(a) Private final consumption expenditure, and
    
(b) Final consumption expenditure of the government

(ii) Final Investment Expenditure:
    
(a) Gross domestic fixed capital formation,
    
(b) Changes in stocks, and
    
(c) Net acquisition of valuables.

(iii) Net exports:

Exports minus imports
    
3. Third Step: It involves the measurements 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 resident non-resident households in the domestic market are deducted, i.e.,

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


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