Correct Option
The correct option is 2 only
Explanation
The Expenditure Method calculates Gross Domestic Product (GDP) by aggregating the total spending on all final goods and services produced within an economy during a specific period. The fundamental formula is represented as:
GDP = C + I + G + (X - M)
- C: Consumption Expenditure
- I: Investment Expenditure
- G: Government Spending
- X - M: Net Exports (Exports minus Imports)
Statement-wise Analysis
- Statement 1 is Incorrect: The method sums up the final expenditure incurred by households (consumption), business firms (investment), the government, and the foreign sector (net exports). This aggregate represents the total demand within the economy.
- Statement 2 is Correct: Expenditure on intermediate goods is strictly excluded in the calculation of GDP to avoid the error of double counting. Only the value of final goods and services-those purchased by the ultimate user-is included.
- Statement 3 is Incorrect: Investment expenditure, technically termed Gross Capital Formation, comprises two main components:
- Gross Fixed Capital Formation: Expenditure on fixed assets like machinery, equipment, and infrastructure.
- Change in Stocks (Inventory Investment): The net change in the inventory of raw materials, semi-finished goods, and finished goods held by producers. Therefore, inventory is included, not excluded.
Key Takeaway
Key Takeaway: Under the expenditure method, GDP accounts only for final goods to prevent double counting, and Investment includes both fixed capital formation and changes in inventory stocks.