With reference to the 'Expenditure Method' of calculating GDP, consider the following statements: 1. Expenditure on intermediate goods is included in the final investment expenditure. 2. It sums up the final expenditure on consumption, investment, government spending, and net exports. 3. Investment expenditure includes only the expenditure on fixed capital goods, excluding inventory. Which of the statements given above is/are correct?

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.

With reference to the 'Expenditure… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 4: National Income Accounting

mcqmedium

With reference to the 'Expenditure Method' of calculating GDP, consider the following statements:

Expenditure on intermediate goods is included in the final investment expenditure.
It sums up the final expenditure on consumption, investment, government spending, and net exports.
Investment expenditure includes only the expenditure on fixed capital goods, excluding inventory.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Macroeconomics · Page 13

Options

A1, 2 and 3
B2 only
C1 only
D1 and 3 only

Did you get this right?

Solution

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.

Your note

More from Chapter 4: National Income Accounting

Consider the following statements regarding 'Inventory Investment': 1. It is treated as a part of capital formation. 2. Only planned accumulation of inventory is counted as investment; unplanned accumulation is treated as a loss. 3. It is always a positive value regardless of whether stocks increase or decrease. Which of the statements given above is/are correct?

medium

With reference to 'Personal Disposable Income (PDI)', consider the following statements: 1. It includes the income that households must pay as taxes to the government. 2. It is calculated by deducting personal tax payments and non-tax payments from Personal Income. 3. It is always less than Personal Income if personal taxes are positive. Which of the statements given above is/are correct?

easy

Which of the following is NOT considered a 'Final Good'?

easy

easy

With reference to the 'GDP Deflator', consider the following statements: 1. It is the ratio of Nominal GDP to Real GDP. 2. It measures the change in the quantity of goods produced, not prices. 3. Unlike the Consumer Price Index (CPI), it does not include the prices of imported goods. Which of the statements given above is/are correct?

medium

Keep practising Chapter 4: National Income Accounting

Work through every question from this NCERT chapter.

Browse all NCERT Class 12 Economics chapters