Topic - 3. Expenditure Method 

Expenditure method is the method which measures final expenditure on gross domestic product at market price during  accounting  year .
This is also called Income-Disposal Method or Consumption and Investment Method.
What is Final Expenditure?
·       It refers to expenditure on final goods and services in an accounting year.
·       The main problem in this context is to find out whether a particular expenditure is final expenditure or intermediate expenditure.
·       The answer to this question depends on the nature of demand. If an enterprise uses the goods purchased from other enterprises for resale or as raw material, the expenditure on such goods will be intermediate expenditure.
·       In this method, final expenditure alone is considered.
·       In India, expenditure method is used to estimate national income in secondary (manufacturing) sectors.
 Classification of Final Expenditure
 Final expenditure is broadly classified as under:
1.    Private Final Consumption Expenditure (C)
It refers to expenditure on final goods and services by the individuals, households and non-profit private institutions serving society (like Help-age).
It includes:
       i.            Consumer Services
     ii.            Consumer non-durable goods that is goods which are not repeatedly used like butter or milk.
  iii.            Consumer durable goods which are repeatedly used for several years, like furniture and washing machines.
2.    Government Final Consumption Expenditure (G)
It refers to expenditure on final goods and services by the Gates are on the purchase of for consumption in the defence personnel.



3.    Investment Expenditure
It refers to expenditure on the purchase of final goods by the producers. These goods are to be further used in the process of production.
Example: expenditure by the farmers on the purchase of tractors or thrashers.
 Investment expenditure is further classified as under:
       i.            Fixed Investment
Fixed investment refers to expenditure by the producers on the purchase of fixed assets like plant and machinery.
 Economists often classify fixed investment as:
(a). Business fixed investment
 (b). Fixed investment by the households in terms of construction of houses and
(c). Public fixed investment or fixed investment by the Government, like expenditure by the Government on the construction of Roads, dams and bridges.

     ii.            Inventory Investment:
It refers to change in stock during the year. As noted earlier,  it is estimated as the difference between dosing stock of the year and opening stock of the year.
4.    Net Exports (X-M)
Net exports refer to the difference between exports and imports during an accounting year. Exports are expenditure by the foreigners on the domestically produced final goods and services, while imports are an expenditure on the goods and services produced abroad.




Precautions while using Expenditure Method
The following precautions are to be taken while using expenditure method:
(1)Final Expenditure is to be taken into account to avoid error of double counting. Final expenditure is to be interpreted as expenditure on final goods and services.

(2) Intermediate expenditure is not included in the calculation of national income. Because the value of intermediate expenditure is already reflected in the value of final expenditure.
 (3) Expenditure on second hand goods is not included.  Because value of second hand goods has already been accounted during the year of their production.
(4) Expenditure on shares and bonds is not included in total expenditure, as these are mere paper claims and are not related to the flow of final goods and services.
(5) Expenditure on transfer payments by the government is not included in total expenditure, e.g. old age pension, scholarship, etc. Because transfer payments do not cause any value addition in the economy.