Spending based calculation of GDP relies on the estimates of expenditure on the final goods and services produced during the year by all the spending units, viz., domestic households, business enterprises, government and the rest of the world. Accordingly, estimates are prepared for the consumption expenditure, investment expenditure, government expenditure and net foreign expenditure. These are discussed below:
Consumption spending comprises of expenditure on the consumer goods produced during the year, both by the individuals or the private households as well as by the government.
The private consumption spending includes such expenses as on food, clothing, entertainment, household electronic goods, medicines, motor cars and all other non-durable and durable goods that are need to satisfy our individual and family requirements. Such expenditure also includes individual’s contribution to charities, religious donations, etc.
Government consumption spending includes expenditure on such services like hospital dispensaries, educational institutions, street lights, etc., that are used by the society collectively, Beside, government expenditure on civil administration, internal security, police, defense services, etc., is also a component of government consumption expenditure. Thus,
Consumption Spending = Private Consumption Spending + Government Consumption Spending
= Total Consumption Expenditure
which is denoted by alphabet C.
Investment spending is defined as expenditure made on production or acquisition of goods not meant for presents consumption but for future use such as production of consumer goods in future time period. The goods on which expenditure is made are called capital goods or investment goods. Plant Machinery, equipment, etc., are the example of capital goods on which business enterprises spend money. Expenditure on production of such fixed assets like machinery and equipment is called fixed investment or fixed capital.
In last Total investment expenditure thus estimated is called gross investment or gross capital formation.
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