Expenditure Method

What is the Expenditure Method?

The expenditure method is a structure for computing the GDP (gross domestic product) that combines utilisation, investment, net exports and government expenditure. It is one of the most common ways to evaluate GDP and it says everything that the private sector, including customers and private enterprises and government expenditure within the frontiers of a particular nation, must sum up to the total value of all finished commodities and services manufactured over a certain time frame. This methodology manufactures nominal gross domestic product, which must then be modified for inflation to outcome in the real GDP.

A substitute way to compute the GDP is by looking at the demand side of the commodities. This methodology is referred to as the expenditure method. In the farmer and the baker instance, in the previous concept, that was discussed earlier,

  • The average value of the output in the economy by expenditure method will be computed in the following way. In this methodology we add the final expenditures that each enterprise makes
  • Final expenditure is that part of expenditure which is shouldered not for halfway purposes
  • The Rs.50 worth of wheat which the bakers purchase from the farmers computes as intermediate goods, therefore, it does not come under the category of final expenditure
  • Hence, the average or aggregate value of output of the economy is Rs.200 (final expenditure received by the baker) + Rs.50 (final expenditure received by the farmer) = Rs.250 per annum.

The above mentioned is the concept that is explained in detail about Expenditure Method. To know more, stay tuned to BYJU’S.