Under Total Expenditures Approach, national income is computed by taking the summation of expenditures of households, firms and government on final goods and services produced both inside and outside the national border of an economy during a year.
Expenditure Approach Symbolic Representation
Where Y = National income
C = Consumption, i.e. expenditure on final consumer goods and services like automobiles, food, medical care, education etc
I = Gross private investment, i.e. expenditures on capital goods like machinery, inventories, shares etc. by the private sector
G = Gout expenditures on the purchases of goods and services used for productive and non-productive activities, i.e. provision of infrastructure, administration, defence etc.
X – M = Expenditures on exports by foreigners minus expenditures on imports by countrymen i.e. net foreign expenditure.
Precautions During Expenditure Approach of National Income
Expenditures on Final Goods
Only those expenditures should be included in national income which are made on final goods. The expenditure made on intermediate goods should not be included.
Expenditures on Newly-Produced Goods
The expenditures on used or on old shares of a company should not be included.
The government expenditures on transfer payments should not be considered.
We conclude that when goods and services are produced, the factors of production engage in the process of production, receive their rewards. They spend their income (factors rewards) on consumption and investment goods. Thus output flow, income flow and expenditures flow appear; each of which reflects national income.
Thus we calculate national income by taking the summation of
Moreover, each approach yields the same calculation of national income accounting. It includes both types of consumption expenditures, i.e. explicit and implicit on durable consumers goods i.e. automobiles etc, non-durable consumers goods i.e. food, clothing etc. and services like medical care, education etc.
Capital goods are
The government transfers the income by different taxing kinds to those individuals who are receiving their income as rewards of their services.
The tax collection is paid to the individuals who are not putting their services to earn income. For example, social security benefits like pension, unemployment allowance etc.