Expenditure method is also called Flow-of-Expenditure method, consumption and investment method, income Disposal method, etc.
Expenditure method measures the final expenditure on goods domestic product market prices during a year.
This method measure the expenditure on GDPMP during a year.
The various steps involved in the use of expenditure method are briefly summarized as follows:
1. First Step: It involves identification of economic units incurring final expenditure. Different economic units are:
(i) Household sector
(ii) Producer sector
(iii) Government sector
(iv) Rest-of-the world sector.
2. Second Step: It involves classification of final expenditure into the following categories:
(i) Final Consumption Expenditure:
(a) Private final consumption expenditure, and
(b) Final consumption expenditure of the government
(ii) Final Investment Expenditure:
(a) Gross domestic fixed capital formation,
(b) Changes in stocks, and
(c) Net acquisition of valuables.
(iii) Net exports:
Exports minus imports
3. Third Step: It involves the measurements of final expenditure. The various components of final expenditure are measured as follows:
To measure Private Final Consumption Expenditure, the volume of final sale of durable goods, semi-durable goods, non-durable goods and services to the consumer households and non-profit institutions serving households is multiplied by market prices (retail prices). The direct purchases of resident households made abroad are added. The direct purchases of resident non-resident households in the domestic market are deducted, i.e.,
Thus, according to the expenditure method GDPMP = Private Final Consumption Expenditure + Expenditure + Government Final Consumption Expenditure + Gross Domestic Investment + Net Exports.