Page 27 - DECO402_Macro Economics

Macroeconomic Theory

Notes For the measurement of national income, following factor of incomes is keep in mind also.
6. Net Factor Income from Abroad: Getting income in exchange of giving factor service in abroad
and in domestic boundary of a country by non-resident giving factor service paid income’s
difference is called Net Factor Income from Abroad.
Net National Income = Compensation of employees + obsolescence (rent + interest + profit) + mixed
income + net factor income from abroad.
(Note: Total addition of rent, interest and profit are called obsolescence surplus.)

(3) Expenditure Method

Expenditure method is that method by which in a financial year at market cost measures final
expenditure on gross domestic product. This method is called Income Disposable Method or
Consumption Investment Method also. This method calculates final expenditure or expenditure on
gross domestic product.

Component of Final Expenditure

1. Final Consumption Expenditure: Its two main components are as follows:
(i) Private Final Consumption Expenditure: In domestic market for calculation of private final
consumption expenditure, consumer households and private non-profit institutions durable
consumption goods, half-durable consumption goods and destructible goods ands service
final selling, their total quantity is multiplied to retail price. In its by non-residents direct
purchase in domestic market to subtracted and by residents households direct purchase in
foreign is added. Resulting data will be equal to private final consumption expenditure.
Product for Self-Consumption is also a part of Private Consumption expenditure. For self
consumption quantity of production is necessary to multiply with producer’s neighbour
market uses cost. Similarly owner occupied houses imputed rent is also included domestic
market’s final consumption expenditure.
(ii) Government Final Consumption Expenditure: Government final consumption expenditure
calculation by enterprises total sells to government is multiplied by retail price. Purchase
from abroad is added also.
2. Gross Domestic Capital Formation: (Capital formation of following two types is included in
its):
(A) Gross Domestic Fixed Capital Formation.
a. Expenditure on Construction – For the calculation of expenditure on construction,
construction material as a cement, steel, bricks, labour, capital factor quantity is
multiplied with their prices. This type of expenditure calculation is called commodity
flow approach. Following items are included in expenditure on construction – (i) For
self accounting, production of fixed capital, (ii) By consumer households purchasing of
new building, (iii) At construction place going work and (iv) Capital repairs as doing
main change in old buildings.
b. The Final Expenditure on Machinery and Equipment – The expenditure on machinery
and equipment can be estimated by two methods – (i) The quantity of final selling is
multiplied with market in use value, (ii) according to commodity flow approach in
current year find out produced total quantity of machinery and equipment and it is
multiplied by cost paid by buyers. By these two methods get equal sum. Producing for
self accounting produced machines and equipments cost is add in that also.

20 LOVELY PROFESSIONAL UNIVERSITY