Expenditure Method

Expenditure method: In this method, the national income is calculated by adding all the expenditures that are done for purchasing the national output.

  • The expenditure method is a system for calculating gross domestic product (GDP) that combines consumption, investment, government spending, and net exports. It is the most common way to estimate GDP. It says everything that the private sector, including consumers and private firms, and government spend within the borders of a particular country, must add up to the total value of all finished goods and services produced over a certain period of time. This method produces nominal GDP, which must then be adjusted for inflation to result in the real GDP.
  • Expenditure is a reference to spending. In economics, another term for consumer spending is demand. The total spending, or demand, in the economy is known as aggregate demand. This is why the GDP formula is actually the same as the formula for calculating aggregate demand; because of this, aggregate demand and expenditure GDP must fall or rise in tandem
  • However, this similarity isn’t technically always present in the real world—especially when looking at GDP over the long run. Short-run aggregate demand only measures total output for a single nominal price level, or the average of current prices across the entire spectrum of goods and services produced in the economy. Aggregate demand only equals GDP in the long run after adjusting for price level.
  • The expenditure method is the most widely used approach for estimating GDP, which is a measure of the economy’s output produced within a country’s borders irrespective of who owns the means to production. The GDP under this method is calculated by summing up all of the expenditures made on final goods and services. There are four main aggregate expenditures that go into calculating GDP: consumption by households, investment by businesses, government spending on goods and services, and net exports, which are equal to exports minus imports of goods and services.
  • There are four factors of production: natural resources or land; human resources or labour; produced means of production or capital; and entrepreneurs or organisation.
  • The payment for the use of land is called rent. Payment for the use of labour is known as wages and payment for the use of capital is known as interest. The factors of production — land, labour and capital are primary factors of production and their contractual payments are called factor incomes. The surplus—what is left after the payment of these primary factors — is called the profit. This residual income is paid to the organiser of production as profit.
  • Thus, income for the participation in the production process may take four forms: rent, wages, interest and profit. By national income we mean the sum-total of all rent, wages, interest and profit earned in the production process during a given period by all the citizens, which is known as the factor payments total.