GDP (Expenditure Components)


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

From the expenditure side, GDP at current market prices can be seen as the sum of –
(a) consumption—both private and public,
(b) investment, also known as Gross Capital Formation (GCF) which comprises fixed capital formation, change in stock and valuables, and,
(c) net exports which represent the difference between exports and imports of goods and non-factor services.
Gross fixed capital formation or fixed investment mainly refers to the value of new machinery and equipment plus the value of new construction activity undertaken during the year. Net acquisition of valuables covers precious articles, gems and stones, silver, gold, platinum, and gold and silver ornaments.
 
                                      Contribution of Components to Real GDP Growth
 
Final expenditures                   Share in GDP (in per cent)
                                                            2011-12      2015-16
Private final consumption               56.2            59.8
Government final consumption      11.1            10.7     
Fixed capital formation                     34.3            29.4     
Change in stock                                 2.4               1.7    
Valuables                                            2.9              1.5
Net exports                                         -6.5             -2.6
GDP at constant market prices       100.0          100.
                                                                    Source: Central Statistics Office (CSO).

 Private Final Consumption Expenditure (PFCE):


It refers to expenditure incurred by households and private non-profit institutions serving households on all types of consumer goods, i.e. durable (except houses), semi-durable, non-durable goods and services.

i. PFCE = Household Final Consumption Expenditure + Private Non-Profit Institutions Serving Households Final Consumption Expenditure

ii. PFCE includes expenditures incurred by normal residents, whether in the domestic territory or abroad. So, any expenditure incurred by residents during their foreign tour/travel will be added in PFCE. However, any expenditure incurred by non-residents and foreign visitors in the domestic market will be deducted from PFCE.

Government Final Consumption Expenditure (GFCE):

It refers to the expenditure incurred by general government on various administrative services like defense, law and order, education etc. Government produces goods and services with the aim of social welfare without any intention of earning profits.

Fixed capital formation

Fixed capital formation refers to the process of a firm increasing its stock of fixed capital. Fixed capital are assets used in the productive process, that a firm holds for over a year. (Fixex capital formation does not include current raw materials used in the productive process).
Fixed capital can also be referred to as Property, Plant, and Equipment (PP&E). For example, if a firm builds a new factory or invests in new machines, this will be an accumulation of fixed capital.

Examples of Fixed Capital Formation are: Building or expanding existing factory; Purchase of transport equipment; Office equipment, such as computers, printers; and Machinery used in the productive process.

Inventory Investment (Change in Stock):

It refers to the physical change in the stock of raw material, semi-finished goods and finished goods lying, with the producers. It is included as an investment item because it represents the goods produced but not used for current consumption. It is calculated as the difference between the closing stock and the opening stock of the year.

It means,

GDCF = Gross Fixed Capital Formation + Inventory Investment; or

GDCF = Gross Business Fixed Investment + Gross Residential Construction Investment + Gross Public Investment + Inventory Investment.

It is important to understand that purchase of shares and debentures, either old or new, is not included in investment. For example, if I have purchased 500 shares of Reliance Industries, it may be an investment from my point of view, but for economy, it is simply a transfer of purchasing power and not an investment.

Valuables 

Valuables as a separate item has been introduced in the expenditure side of GDP. Since India is one of largest importer and user of gold for various purposes, this treatment resulted into higher share of valuables in capital formation in the economy.  Moreover, from conceptual aspect, these valuables are not related to capital formation in the economy and are kept as a store of value.

Net Exports (X – M):

It refers to the difference between exports and imports of a country during a period of one year.

1. Exports (X) refer to expenditure by foreigners on purchase of domestic products. The exported goods have been produced within the country’s domestic territory So; they are included in output of an economy.

2. Imports (M) is the expenditure by residents on foreign products. Imports are deducted to obtain domestic product as they are not produced within the domestic territory.

3. Instead of treating exports and imports separately, the difference between the two is taken and is termed as Net Exports.




Friday, 15th Jul 2016, 10:55:15 AM

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