GDP @ market price = C + I + G + (X-M)
Let us what these stands for:
1) C = Private consumption expenditure
It is expenditure of households on goods and service consumption.
Consumption of : –
a) Non durable good – Consumed immediately
b) Durable – Consumed Gradually
c) Services – (Doctor, Lawyer fees etc)
This ‘C’ is 2/3rd total GDP.
Some Facts about consumption:
a) When Interest rate ↑, People saving ↑, Consumption ↓
b) When taxes ↓, income ↑, consumption ↑
c) When wage revision takes place (7th pay commission etc), Income ↑, Consumption ↑
**Household expenditure on Tax are excluded
2) I = Investment (Capital formation)
Total investment = A) Fixed investment + B) Inventory investment + C) Residential Investment
A) Fixed Investment = Buying capital goods, robots, machine (But not raw material)
B) Inventory Investment = Investment on goods awaiting sale on store shelves. More products on store shelves – less sale = ↑inventory investment
C) Residential Investment = Purchase of new home (But not old)
3) G = Government Purchases (Govt final consumption)
It is expenditure of govt (Both state and central) on new goods and service. (Excluding transfers)
A) Compensation of Employees (Salary to govt employee)
B) National Defense and Security ( Not military as military items used continuously for more than one year for “production purposes” meet the criteria of capital formation or ‘C’)
C) Welfare Schemes
4) X-M = Export – Import
It is important component as we have to keep a check on our citizens expenditre on foreign products (Which is to be excluded) and at same time foreigners expenditure on Indian product is to be included.
Now C + I + G + (X-M) = GDP @ mp. For NNP @ fc
GDP @ mp – depreciation = NDP @ mp .
NDP @ mp + NFIA = NNP @ mp
NNP @ mp – taxes + subsidies = NNP @ fc (National Income)
Some Caveats while using expenditure method:
(i) Avoid intermediate expenditure:
Include only final expenditures, i.e. expenditure on consumption
and investment. You can’t add both tyre price and car price (which already include tyre) separately.
(ii) Do not include expenditure on second hand goods and financial assets
Only new production activities value is to be included. You can’t sell a car 10 times and add it’s value each time.
(iii) Include the self use of own produced final products.
Like imputed rent, in which owner of house living in own house, rent is considered.
(iv) Avoid transfer expenditures
Only factor payment to be included.