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Difficulty: Very hardExpenditure Method of Measurement

The table below presents the national income accounting estimates for a hypothetical open economy in a given financial year:

ComponentAmount ($ billions)
Personal Consumption Expenditure450
Gross Domestic Fixed Capital Formation180
Value of Physical Change in Stocks30
Government Final Consumption Expenditure150
Government Transfer Payments35
Exports of Goods and Non-Factor Services90
Imports of Goods and Non-Factor Services110
Net Factor Income from Abroad-15
Depreciation (Consumption of Fixed Capital)40
Indirect Taxes50
Subsidies20

Using the expenditure approach, what is the Net National Product at factor cost (NNPfcNNP_{fc}) for this economy?

  1. 705705 billionAnswer
  2. B
    740740 billion
  3. C
    735735 billion
  4. D
    925925 billion

Answer

705705 billion
The expenditure method sums consumption, investment, government spending, and net exports to calculate GDPmpGDP_{mp} (450+210+150−20=790450 + 210 + 150 - 20 = 790 billion). Adding net factor income from abroad gives GNPmpGNP_{mp} (775775 billion). Subtracting depreciation yields NNPmpNNP_{mp} (735735 billion), and deducting net indirect taxes (50−20=3050 - 20 = 30 billion) gives NNPfc=705NNP_{fc} = 705 billion. Transfer payments are excluded to avoid double counting.

Step-by-Step Solution

1
Calculate Gross Domestic Product at market prices (GDPmpGDP_{mp}) using the expenditure components: C+I+G+(X−M)C + I + G + (X - M)
GDPmp=450+(180+30)+150+(90−110)=790GDP_{mp} = 450 + (180 + 30) + 150 + (90 - 110) = 790 billion
Gross domestic investment equals gross domestic fixed capital formation plus change in stocks. Transfer payments are excluded as they are non-productive transactions.
2
Adjust GDPmpGDP_{mp} for Net Factor Income from Abroad (NFIANFIA) to find Gross National Product at market prices (GNPmpGNP_{mp})
GNPmp=790+(−15)=775GNP_{mp} = 790 + (-15) = 775 billion
GNPmp=GDPmp+NFIAGNP_{mp} = GDP_{mp} + NFIA.
3
Deduct depreciation (consumption of fixed capital) to determine Net National Product at market prices (NNPmpNNP_{mp})
NNPmp=775−40=735NNP_{mp} = 775 - 40 = 735 billion
Net national aggregate equals gross national aggregate minus capital consumption.
4
Convert NNPmpNNP_{mp} to Net National Product at factor cost (NNPfcNNP_{fc})
NNPfc=735−50+20=705NNP_{fc} = 735 - 50 + 20 = 705 billion
Factor cost is obtained by deducting indirect taxes and adding subsidies (NNPfc=NNPmp−Indirect Taxes+SubsidiesNNP_{fc} = NNP_{mp} - \text{Indirect Taxes} + \text{Subsidies}).

Key Concept

Expenditure Method of Measuring National Income and Aggregate Adjustments
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Topics

Expenditure Method of Measurement

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