Posted by Anjali Kaur on Aug 18, 2020

How to Calculate National Income with the Expenditure Method?

Under national income accounting, we have seen the first two method:

  1. Value-added method,
  2. Income method, now we will understand the third and final method for the calculation of GDP, which is the expenditure method. We will see the formulas required to calculate national income with the expenditure method and will understand- How to Calculate National Income with the Expenditure Method? I will also share tips for solving the questions related to this method. But make sure you have revised the first two methods thoroughly before jumping into this. Let’s learn.

Formulas of The Expenditure Method in National Income

Let’s have a look at all the formulas used under this method:

Don’t worry about the length of the formulas. It’s really easy if you follow the basic steps:

1. With the expenditure method, we calculate GDPmp just like in the value-added method we get the same national income aggregate. But with the Income method, we find NDPfc.

2. Under the expenditure method, GDPmp = Private final consumption expenditure (P)+ Government final consumption expenditure (G)+ Gross domestic capital formation (K)+ net exports (X). In short, it includes expenses of the private sector, expenses of the government sector, the amount of the capital generated in a country domestically, and the amount raised from selling goods abroad.

3. Net exports are export minus imports, or negative net imports.

4. Depreciation formulas you call recall from the conversion list, it is gross minus net.

5. Now focus on the box formulas, GDCF stands for Gross domestic capital formation. It has two important formulas which are, GDCF = Gross domestic fixed capital formation (if has given) plus the change in stock, or, GDCF = Net domestic capital formation plus depreciation.

6. Sometimes in question, we have to calculate Gross domestic Fixed capital formation by adding Net domestic fixed capital formation and depreciation.

It’s okay, if you didn’t comprehend the GDCF part, we will understand it while we practice numerical on GDCF.

Make sure you have written, printed, or downloaded this formula list. Trust me, you will not find these formulas easily in any book or on the net. 😎

Numerical on The Expenditure Method

Question 1. Calculate ‘National Income’ from the expenditure method:

ParticularsAmount
Net Indirect Taxes 5
Net Fixed Capital Formation100
Government Final Consumption Expenditure200
Net Imports-20
Net current transfers from abroad15
Private Final Consumption Expenditure600
Net Factor Income from Abroad5
Gross Domestic Fixed Capital Formation125
Change in Stock10

Solution.

National Income means the question is asking us to find NNPfc, but with the expenditure method, we get GDPmp. So, find GDPmp first and then apply the basic conversion method.

GDPmp = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports

First, fill in the above formula, whatever information you have from the question:

GDPmp = 600 + 200 + 135* + 20* = 955 (Follow the explanation below)

Gross Domestic Capital Formation = Gross Domestic Fixed Capital Formation + Change in Stock

GDCF = 125 + 10 = 135 *

*Net Exports = – Net Imports

*Net Exports = – (-20) = 20

Now, we will calculate NNPfc = GDPmp – Net Indirect Taxes +NFIA – Depreciation

Calculate depreciation

Depreciation= Gross Domestic Fixed Capital Formation – Net Fixed Capital Formation

Depreciation = 125 – 100 = 25

NNPfc = GDPmp – Net Indirect Taxes + NFIA – Depreciation

NNPfc = 955 – 5 +5 – 25 = 930

Question 2. From the following data, calculate GNPmp by Income method and Expenditure Method:

ParticularsAmount
Mixed-income of self-employed400
Compensation of employees500
Private final consumption expenditure900
NFIA(-)20
Net indirect taxes100
Consumption of fixed capital120
Net domestic capital formation280
Net exports(-)30
Profits350
Rent100
Interest150
Government final consumption expenditure450

Solution. Let’s start with Income method first

NDPfc = Compensation of Employees + Operating Surplus + Mixed-Income of Self-employed

NDPfc = 500 + 600*🤷‍♂️ + 400 = 1500

🤷‍♀️Operating Surplus* = R+ R+ I+ P

Operating Surplus = 100 + 0 + 150 + 350 = 600

In the question, we are asked to calculate GNPmp, which we can find by the basic conversion method.

GNPmp = NDPfc + NIT + NFIA + Depreciation

GNPmp = 1500 + 100 + (-20) + 120 = 1700

Consumption of fixed capital and depreciation are the same things.

Now, we use the Expenditure method to find GNPmp:

GDPmp = PFCE + GFCE +GDCF +NX

GDPmp = 900 + 450 + 400* + (-30) = 1720

GDCF* = Net domestic capital formation + Depreciation = 280 + 120 = 400

According to the question, we have to calculate GNPmp by using the basic conversion method

GNPmp = GDPmp + NFIA

GNPmp = 1720 + (-20) = 1700

Hence, you can observe that whether you find from the income method or the expenditure method, the answer for the GNPmp is the same as 1700.

This tip you can use, you cross verify in your exams whether you are attempting the question correctly or not. Now, time to test yourself.

Test Yourself

Question 1. Calculate ‘National Income’ from the following data:

ParticularsAmount
Net Indirect Taxes5
Net fixed domestic capital formation100
Net imports(-)20
Government final consumption expenditure200
Net current transfers from abroad15
Private final consumption expenditure600
Change in stock10
NFIA5
Gross domestic fixed capital formation125

Question 2. From the following data, calculate National income by Income method and Expenditure method:

ParticularsAmount
Change in stock50
Compensation of employees1900
Private final consumption expenditure2000
NFIA(-)20
Net indirect taxes400
Consumption of fixed capital100
Net capital formation400
Net exports20
Operating surplus720
Rent200
Interest150
Government final consumption expenditure600
Employer contribution to social security schemes100

Question 3. Calculate “National income” from the following :

ItemsParticulars
Net imports60
Net current transfers to abroad(-)10
Net domestic fixed capital formation300
Government final consumption expenditure200
Private final consumption expenditure700
Consumption of fixed capital70
Net change in stocks30
Net factor income to abroad20
Net indirect tax100

Question 4. Calculate ‘Net Domestic Product at Factor cost”:

ItemsParticulars
Net current transfer to aboard15
Private final consumption expenditure800
Net Imports(-)20
Net domestic capital formation100
Net factor income to abroad10
Depreciation50
Change in stock17
Net indirect tax120
Government final consumption expenditure200
Exports30

Question 5. Calculate “ Net National Product at market price”:

ItemsAmount
Transfer payments by the government7
Government final consumption expenditure50
Net imports(-)10
Net domestic fixed capital formation60
Private final consumption expenditure300
Private income280
Net factor income to abroad(-)5
Closing stock8
Opening stock8
Depreciation12
Corporate tax60
Retained earnings of corporations20

Question 6. Calculate ‘Net domestic Product at market price”:

ItemsAmount
Private final consumption expenditure400
Opening stock10
Consumption of fixed capital25
Imports15
Government final consumption expenditure90
Net current transfers to ROW5
Gross domestic fixed capital formation80
Closing stock20
Exports10
Net factor income to abroad(-)5

Question 7. Calculate National Income:

ItemsAmount
Net Imports5
Net domestic capital formation15
Personal income90
National debt interest10
Corporate tax25
Government final consumption expenditure20
Net factor income to abroad(-) 5
Net indirect tax10
Undistributed profits0
Private final consumption expenditure100

Try solving at least 1 of them, share your solution. I will check it and tell you the correct one. You know, where to drop your solved solution. Its Contact@LearnWithAnjali.com

Thanks for understanding the method.

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Happy Learning!

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