Components of Final Expenditure

There are 4 Main components of Final Expenditure

• Private Final Consumption Expenditure
• Government Final Consumption Expenditure
• Gross Domestic Capital Formation
• Exports - Imports

Lets learn about it one by one

Private Final Consumption Expenditure

It refers to expenditure incurred by households on different types of goods and services

These goods may be durable or non durable

(Durable goods refers to goods which can be used for long period of time and does not need to be purchased frequently - Example-TV, CAR)

Non durable goods refers to consumer goods which are used for short period of time (Example Food items, Petrol)

It also includes expenditure by non profit institutions serving households

Example - Expenditure by Resident Welfare Association on behalf of different households

Important Points

It includes expenditure by normal residents

This expenditure may be incurred in India or Outside India

However, it does not include expenditure by foreign visitors in India

All Durable goods covered except Houses

House is also durable goods but it is not included in Private Final Consumption Expenditure

It is taken as a part of Gross Domestic Capital Formation

Government Final Consumption Expenditure

It refers to expenditure incurred by Government on various Administrative Service

Example - Defense, Police, Education etc

It includes the following

Salary and Office expenses of Government Departments

Expenses of Indian Embassy located abroad

Intermediate Consumption of Government in providing these goods and services

Example

Government Spends Rs 100 crores on paying Salary to police

It also spends Rs 5 Crores on Providing uniform to police staff free of cost

In this case,

100 Crore is Direct Administrative Expense

5 Crores is Intermediate Consumption

Total 105 Crores is Govt Final Consumption Expenditure

Note

If any amount charged from public, then this amount is Reduced

Example 2 - Intermediate Consumption of Govt

Government Spends Rs 100 crores on paying Salary to police

It also spends Rs 5 Crores on Providing uniform to police staff

It provides these uniform at subsidized price of 2 Crores

In this case,

Government Final Consumption Expenditure

=100 Crore + 5 Crores -2 Crores

=103 Crores

Gross Domestic Capital Formation

It refers to expenditure incurred for increasing the capital stock of economy

It is of 2 types

• Gross Fixed Capital Formation

It is the expenditure incurred on purchase of fixed assets

These may be purchased by

Firm - It is called Gross Business Fixed Investment (It is expenditure on purchase of plant and machinery, equipment etc by firms)

Household - It is called Gross Residential Construction Investment (it is expenditure on purchase or construction of new houses()

Government - it is expenditure on public investment by Government like construction of roads, bridges etc

Inventory Investment

It is physical change in stock of inventory

This inventory may be Raw Material, Semi Finished or Finished goods

We calculate Closing Stock-Opening Stock in this case

Note

It does not include stock of consumer goods of households

Example - Stock of AC ,Fridge with Households

We know that

Export of goods means

Expenditure by foreigners on purchase of domestic products

Import of goods means

Expenditure by residents on purchase of foreign Products

Net Exports means

Difference between Exports and Imports

Example

Exports =1000,Imports =300

Net Exports =700

Exports =1000.Imorts =1300

Net Exports =-300

Expots =0.Imports =1300

Net Exports = -1300

Note

If in Question ,Net Imports given

To Calculate Net Exports ,we use opposite sign

If Net Imports = 400

it means Net Exports =-400

If Net Imports 500

it means Net Exports =-500