Using Total Expenditure for Calculating National Income
The expenditure approach centres on the components of final demand which generate production. It thus measures GDP as the total sum of expenditure on final goods and services produced in an economy. It includes all consumers' expenditure on goods and services, except for the purchase of new houses which is included in gross fixed capital formulation. Secondly we included all general government final consumption. This includes all current expenditure by central and local government on goods and services, including wages and salaries of government employees. To these we add gross fixed capital formation or expenditure on fixed assets (buildings, machinery, vehicles etc) either for replacing or adding to the stock of existing fixed assets. This is the major part of the investment which takes place in the economy. In addition we add the value of physical increases in the stocks, or inventories, during the course of the year. The total of all this gives us Total domestic expenditure (TDE). We then add expenditure on exports to the TDE and arrive at a measure known as Total Final Expenditure. It is so called because it represents the total of all spending on final goods. However, much of the final expenditure is on imported goods and we therefore subtract spending on imports.
Having done this we arrive at a measure known as gross domestic product at market prices. To gross domestic product at market price we subtract the taxes on expenditure levied by the government and add on the amount of subsidy. When this has been done we arrive at a figure known as Gross Domestic Product at factor cost. National Income however is affected by rent, profit interest and dividends paid to, or received from, overseas. This is added to GDP as net property income from abroad. This figure may be either positive or negative. When this has been taken into account we arrive at the gross national product at factor cost. As production takes place, the capital stock of a country wears out. Part of the gross fixed capital formation is therefore, to replace worn out capital and is referred to as Capital Consumption. When this has been subtracted we arrive at a figure known as the net national product. Thus, summarising the above, we can say:
Y = C + I + G + (X - M)