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
