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Typically, GDP is calculated by adding up all expenditures in the economy. Arrange the following components in the decreasing order in terms of their contribution to India’s annual GDP.
  1. Private Final Consumption Expenditure (PFCE).
  2. Government Final Consumption Expenditure (GFCE)
  3. Gross Fixed Capital Formation (GFCF)
  4. Net exports
Select the correct answer code:
  • a)
    1-2-3-4 
  • b)
    3-1-2-4 
  • c)
    1-3-2-4 
  • d)
    1-3-4-2
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
Typically, GDP is calculated by adding up all expenditures in the econ...
's GDP:

1. Consumption expenditure by households
2. Gross fixed capital formation (investment)
3. Government expenditure on goods and services
4. Net exports (exports minus imports)

The correct order is:

1. Consumption expenditure by households
2. Gross fixed capital formation (investment)
3. Government expenditure on goods and services
4. Net exports (exports minus imports)
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Community Answer
Typically, GDP is calculated by adding up all expenditures in the econ...
Typically, GDP is calculated by adding up all expenditures in the economy. These expenditures are broadly categorised in four groups:
  • All the money Indians spend in their personal capacity— from buying an ice cream to watching a movie to buying a TV or car. This is called thePFCE. Such expenditures account for 55%-60% of India’s annual GDP.
  • All the money thegovernments spendon their daily uses — paying salaries etc. This is called Government Final Consumption Expenditure (GFCE) and this accounts for 10% of India’s GDP.
  • All the money spent by private companies and governments towards building productive capacitiesin the economy. Say a firm buying desktops for its employees or the government spending money on building a road. This is called the Gross Fixed Capital Formation (GFCF)and this accounts for 30%-32% of the GDP.
  • Net exportsor the net of all the money that Indians received by exporting goods and services and minus all the money they spent on importing goods and services. More often than not, India’s imports are more than its exports. As such the Net Exports component is negative and drags down overall GDP.
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In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Whenever there is a decline in the proportion of consumption expenditure on cereals

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