State the various components of the Expenditure Method that are used to calculate national income.

OR

Discuss any two differences between GDP at constant prices and GDP at current Prices.

Expenditure method is the method of calculating the national income in the economy by adding all the final expenditure that is made by all sectors in the economy. This method is also known as ‘Income Disposal Method'. This total final expenditure is equal to gross domestic product at a market price which is GDP at market price. Various components of the expenditure method are:

• Private Final Consumption Expenditure (PFCE): This expenditure refers to the expenditure incurred by households and private non-profit institutions serving households on all types of consumer goods, i.e. durable (except houses), semi-durable, non-durable goods and services. It includes the income-expenditure of the normal household whether the income is formed domestic territory or abroad. But, any expenditure incurred by non-residents and foreign visitors in the domestic market will be deducted from PFCE.

• Government Final Consumption Expenditure (GFCE): It includes the expenditure incurred by the government in all the sources as administrative, defence, law and order, education etc. The government expenditure will be mostly based on increasing the social status and development of the economy.

• Gross Domestic Capital Formation (GDCF): It is the addition made to the total capital stock that is being formed in the economy. It refers to the expenditure made in acquiring the goods for the production and these units are being located within the domestic territory. There are further two components of the Capital Formation:

a. Gross Fixed Capital Formation (GFCF): It includes the expenditure which is made on the fixed capital that prevails in the economy. The machinery for the production in the production units is the example for the fixed capital formation.

b. Change in stock: It can be determined by taking the difference between the old stock and new stock. It is included as an investment item because it represents the goods produced but not used for current consumption.

GDCF = GFCE + change in stock

• Net export: It is referred by the difference between the total export and total import. It has two components:

a. Export (X): It refers to the selling of domestic goods to foreign countries. Since the exported goods are being produced domestic territory then it should be included in the national income accounting.

b. Import (M): It refers to the expenditure by residents on foreign products. Imports are deducted to obtain the domestic product as they are not produced within the domestic territory.

Net export = (X – M)

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