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Difficulty: Very hardExpenditure Method of Measurement

The national statistics bureau of a developing economy released the following macroeconomic estimates for a given financial year:

Macroeconomic ComponentAmount ($ million)
Gross Fixed Capital Formation350
Changes in Inventories50
Government Final Consumption Expenditure250
Exports of Goods and Services180
Imports of Goods and Services220
Net Factor Income from Abroad-30
Consumption of Fixed Capital60
Indirect Taxes80
Subsidies20
Government Transfer Payments45
Intermediate Purchases110

If the Net National Product at factor cost (NNPfcNNP_{fc}) for the economy was calculated as $960\$960 million, what was the value of Private Final Consumption Expenditure (CC)?

  1. A
    420420 million
  2. 500500 millionAnswer
  3. C
    455455 million
  4. D
    440440 million

Answer

500500 million
The correct answer is 500500 million. GDPmpGDP_{mp} is derived by converting NNPfcNNP_{fc} back to market prices: GDPmp=960−(−30)+60+80−20=1110GDP_{mp} = 960 - (-30) + 60 + 80 - 20 = 1110 million. Substituting total gross investment (400400 million), government final consumption (250250 million), and net exports (−40-40 million) into GDPmp=C+I+G+(X−M)GDP_{mp} = C + I + G + (X - M) yields 1110=C+6101110 = C + 610, which solves to C=500C = 500 million. Transfer payments and intermediate purchases are correctly excluded.

Step-by-Step Solution

1
Examine the relationship between Net National Product at factor cost (NNPfcNNP_{fc}) and Gross Domestic Product at market prices (GDPmpGDP_{mp}).
NNPfc=GDPmp+NFIA−Depreciation−Indirect Taxes+SubsidiesNNP_{fc} = GDP_{mp} + \text{NFIA} - \text{Depreciation} - \text{Indirect Taxes} + \text{Subsidies}
Converting from factor cost to market prices requires reversing net indirect taxes, while converting NNP to GDP requires adjusting for net factor income from abroad and capital consumption.
2
Substitute the given aggregates to solve for GDPmpGDP_{mp}.
960=GDPmp+(−30)−60−80+20  ⟹  960=GDPmp−150  ⟹  GDPmp=1110960 = GDP_{mp} + (-30) - 60 - 80 + 20 \implies 960 = GDP_{mp} - 150 \implies GDP_{mp} = 1110 million
Transfer payments (4545 million) and intermediate purchases (110110 million) are unearned transfers and intermediate inputs respectively, so they must be completely excluded to avoid double counting.
3
Calculate Gross Investment (II) and Net Exports (X−MX - M).
I=350+50=400I = 350 + 50 = 400 million; Net Exports (X−MX - M) =180−220=−40= 180 - 220 = -40 million
Gross investment consists of gross fixed capital formation plus inventory adjustments. Net exports equal total exports minus total imports.
4
Use the expenditure identity GDPmp=C+I+G+(X−M)GDP_{mp} = C + I + G + (X - M) to determine Private Final Consumption Expenditure (CC).
1110=C+400+250+(−40)  ⟹  1110=C+610  ⟹  C=5001110 = C + 400 + 250 + (-40) \implies 1110 = C + 610 \implies C = 500 million
Subtracting non-consumption expenditure components from total GDP at market price leaves private final consumption expenditure.

Key Concept

Expenditure Approach to National Income Measurement
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Topics

Expenditure Method of Measurement

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