Expenditure Method Precautions
Master the precautions of expenditure method for Calculating National Income
Why These Precautions Matter
When calculating national income using the expenditure method, we need to be very careful about what we include and what we don't. Think of it like making a recipe - if you add the wrong ingredients or add some ingredients twice, then your final dish will not taste good! Let's explore these important precautions with easy examples.
Final Goods vs Intermediate Goods
When calculating national income, we should only consider final goods and services - those that have already reached the end consumer. Intermediate goods (used to make other goods) should be excluded to avoid double counting.
Raw materials, components, and goods and services used in production process
Finished products purchased by end consumers
Second-Hand Goods
Second-hand goods were already counted when they were first produced and sold. Including them again, would mean double counting! However, any commission or service fees paid, during the resale should be included as these represent new services.
The actual price paid for second-hand items
Fees paid to dealers, brokers, or platforms for facilitating the sale
Financial Assets
Buying shares, bonds, or debentures doesn't produce new goods or services - it's just transferring ownership. These are "paper claims" that don't add real value to the economy. But brokerage fees and commissions paid for these transactions are new services and included in national income.
Money spent buying shares, bonds, debentures
Fees paid to brokers and financial service providers
Imputed Values
Sometimes people produce things for themselves or use their own property. Even though no sale is made, but these activities have economic value and should be included. We estimate these "imputed values" based on market prices.
- Own account production: Companies using their products internally
- Self-consumption: Farmers eating their own crops
- Owner-occupied housing: Estimated rent for houses people own and live in
Transfer Payments
Transfer payments are money given without receiving any goods or services in return. These don't represent new production or economic activity - they're just moving money from one person to another. Including them would overstate the economy's actual output.
- Scholarships : Money given to students
- Donations: For Charitable purpose
- Gifts: On Social Occasions
- Unemployment Allowance: Government Support payments to unemployed
Quick Reference Guide
Remember these key points when applying the expenditure method
🎯 Final Goods Only
Count finished products, not raw materials or components
🔄 No Double Counting
Exclude second-hand goods but include commission and Brokerage
📄 Paper vs Real
Exclude financial assets but include transaction fees and brokerage
💭 Estimate Hidden Value
Include imputed values for self-production and consumption
🎁 No Free Money
Exclude transfer payments - they don't create new economic value
