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Difficulty: HardExpenditure Method of Measurement

The central statistical office of a sovereign economy released the following national income estimates for a given fiscal year:

Economic IndicatorValue ($)
Net National Product at factor cost (NNPfcNNP_{fc})850850 billion
Net Factor Income from Abroad (NFIANFIA)−$30-\$30 billion
Depreciation (Capital Consumption Allowance)$60\$60 billion
Indirect Taxes$70\$70 billion
Subsidies$20\$20 billion
Private Final Consumption Expenditure (CC)$520\$520 billion
Government Final Consumption Expenditure (GG)$210\$210 billion
Changes in Stocks (Inventory Investment)$40\$40 billion
Net Exports (X−MX - M)−$15-\$15 billion

Based on the expenditure method of measuring national income, what is the value of Gross Domestic Fixed Capital Formation?

  1. A
    $175\$175 billion
  2. $235\$235 billionAnswer
  3. C
    $275\$275 billion
  4. D
    $115\$115 billion

Answer

The Gross Domestic Fixed Capital Formation is $235\$235 billion.
To find the Gross Domestic Fixed Capital Formation, we first calculate GDPmpGDP_{mp} from NNPfcNNP_{fc}:
1. NNPmp=NNPfc+Indirect Taxes−Subsidies=850+70−20=$900NNP_{mp} = NNP_{fc} + \text{Indirect Taxes} - \text{Subsidies} = 850 + 70 - 20 = \$900 billion.
2. GNPmp=NNPmp+Depreciation=900+60=$960GNP_{mp} = NNP_{mp} + \text{Depreciation} = 900 + 60 = \$960 billion.
3. GDPmp=GNPmp−NFIA=960−(−30)=$990GDP_{mp} = GNP_{mp} - NFIA = 960 - (-30) = \$990 billion.

Under the expenditure approach, GDPmp=C+Ifixed+ΔStock+G+(X−M)GDP_{mp} = C + I_{\text{fixed}} + \Delta\text{Stock} + G + (X - M).
Substituting the given values:
990=520+Ifixed+40+210−15990 = 520 + I_{\text{fixed}} + 40 + 210 - 15
990=Ifixed+755  ⟹  Ifixed=$235990 = I_{\text{fixed}} + 755 \implies I_{\text{fixed}} = \$235 billion.

Step-by-Step Solution

1
Convert Net National Product at factor cost (NNPfcNNP_{fc}) to Net National Product at market prices (NNPmpNNP_{mp}).
NNPmp=NNPfc+Indirect Taxes−Subsidies=850+70−20=$900NNP_{mp} = NNP_{fc} + \text{Indirect Taxes} - \text{Subsidies} = 850 + 70 - 20 = \$900 billion.
Market price valuation includes net indirect taxes (indirect taxes minus subsidies).
2
Convert NNPmpNNP_{mp} to Gross National Product at market prices (GNPmpGNP_{mp}).
GNPmp=NNPmp+Depreciation=900+60=$960GNP_{mp} = NNP_{mp} + \text{Depreciation} = 900 + 60 = \$960 billion.
Gross aggregates include capital consumption allowance (depreciation).
3
Convert GNPmpGNP_{mp} to Gross Domestic Product at market prices (GDPmpGDP_{mp}).
GDPmp=GNPmp−NFIA=960−(−30)=960+30=$990GDP_{mp} = GNP_{mp} - NFIA = 960 - (-30) = 960 + 30 = \$990 billion.
Gross Domestic Product equals Gross National Product minus Net Factor Income from Abroad.
4
Apply the expenditure formula for GDPmpGDP_{mp} to isolate Gross Domestic Fixed Capital Formation (IfixedI_{\text{fixed}}).
GDPmp=C+Ifixed+ΔStock+G+(X−M)  ⟹  990=520+Ifixed+40+210+(−15)  ⟹  990=Ifixed+755  ⟹  Ifixed=990−755=$235GDP_{mp} = C + I_{\text{fixed}} + \Delta\text{Stock} + G + (X - M) \implies 990 = 520 + I_{\text{fixed}} + 40 + 210 + (-15) \implies 990 = I_{\text{fixed}} + 755 \implies I_{\text{fixed}} = 990 - 755 = \$235 billion.
Total investment expenditure (Gross Capital Formation) consists of Gross Domestic Fixed Capital Formation plus Changes in Stocks.

Key Concept

Expenditure Method of National Income Accounting and Aggregate Conversion
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Topics

Expenditure Method of Measurement

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