Expenditure Method of Calculating National Income

The expenditure method is one of the three methods of calculating national income, the other two being the income method and the production method. The expenditure method is also known as the output method or the demand method.

Components of Expenditure Method

The expenditure method considers the total spending or demand for goods and services in an economy. It includes the following components:

1. Consumption Expenditure: It is the spending by households on goods and services for their own consumption.

2. Investment Expenditure: It is the spending by firms on capital goods and the changes in inventory levels.

3. Government Expenditure: It includes the spending by the government on goods and services.

4. Net Exports: It is the difference between the value of exports and imports.

Calculating National Income

To calculate national income using the expenditure method, we need to add up the above components of spending. The formula for calculating national income using the expenditure method is:

National Income (Y) = C + I + G + NX

Where,
C = Consumption expenditure
I = Investment expenditure
G = Government expenditure
NX = Net exports

Treatment of Change in Stock

Change in stock, also known as inventory investment, is the change in the level of inventories held by firms over a period of time. It can be positive or negative. A positive change in stock means that the level of inventories has increased, while a negative change in stock means that the level of inventories has decreased.

In the expenditure method, change in stock is considered a part of investment expenditure. It is added to gross domestic capital formation (GDCF) or net domestic capital formation (NDCF), depending on the circumstances.

If the change in stock is positive, it means that firms have invested in inventories, which is a part of their capital stock. In this case, it is added to gross domestic capital formation (GDCF) to calculate national income.

On the other hand, if the change in stock is negative, it means that firms have reduced their inventories, which is a part of their capital stock. In this case, it is added to net domestic capital formation (NDCF) to calculate national income.

Conclusion

In conclusion, the expenditure method is one of the three methods of calculating national income. It considers the total spending or demand for goods and services in an economy. Change in stock is considered a part of investment expenditure and is added to gross domestic capital formation (GDCF) or net domestic capital formation (NDCF), depending on whether it is positive or negative.

It is added to gross domestic capital formation.