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There are 4 Main components of Final Expenditure

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

Components of Final Expenditure - Teachoo.JPG

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

What is Private Final Consumption Expenditure - Teachoo.JPG

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

What is Government Final Consumption Expenditure - Teachoo.JPG

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

Types of Gross Domestic Capital Formation - Teachoo.JPG

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

How to Calculate Net Exports - Teachoo.JPG

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

 

 

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Transcript

Components of Final Expenditure PFCE GFCE GDCE NE Private Final Consumption Expenditure Government Final Consumption Expenditure Gross Domestic Capital Formation Net Exports (Exports - Imports) This is of Households This is of Government This is of 3 Sectors Household (Gross Residential Construction Exp) Firm Gross Business Fixed Investment and Inventory Investment Government Gross Public investment This is of External Sector What is Private Final Consumption Expenditure? Expenditure by Households Non Durable Durable (Used One time) (Used again and again Example Food, Petrol Other than house Example TV, Car Purchase of house Example Purchase of Apartment) This is Private Final Consumption Exp This is not Private Final Consumption Exp it is part of Gross Domestic Capital formation or Gross investment What is Government Final Consumption Expenditure Salary and Office Expenses of Govt Staff Expenses of Indian Embassy Intermediate Goods in Providing this Service Making Roads, bridges All these is Govt Final Consumption Expenditure This is not Govt Final Consumption Expenditure it is part of Gross Domestic Capital formation or Gross investment Types of Gross Domestic Capital Formation Expenditure on Purchasing Fixed Assets Expenditure on Purchasing Stock it is called Gross Fixed Capital Formation it is called Inventory Investment Expenditure By Firm Expenditure By household Expenditure by Government This Expenditure is normally by Firm Gross Business Fixed Investment Gross Residential Construction Investment Public Investment Example Purchase of Machine Example Purchase of House Example Bridges, Roads constructed by Govt How to Calculate Net Exports Export India Sale Foreign Country Import Foreign Country Sale India Difference of these two is called Net Exports Example Exports =1000,Imports = 300 Net Exports = 700 Exports =1000.Imorts = 1300 Net Exports =-300 Exports =0.Imports = 1300 Net Exports = 1300

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Davneet Singh is a graduate from Indian Institute of Technology, Kanpur. He has been teaching from the past 12 years. He provides courses for Maths and Science at Teachoo.