Give briefly outline of Expenditure Method. State precautions to be taken in expenditure method to avoid double counting

Expenditure Method

 The expenditure method is a system for calculating gross domestic product (GDP) that combines consumption, investment, government spending, and net exports. It is the most common way to estimate GDP. It says everything that the private sector, including consumers and private firms, and government spend within the borders of a particular country, must add up to the total value of all finished goods and services produced over a certain period of time. This method produces nominal GDP, which must then be adjusted for inflation to result in the real GDP.

The expenditure method may be contrasted with the income approach for calculated GDP.

Expenditure is a reference to spending. In economics, another term for consumer spending is demand. The total spending, or demand, in the economy is known as aggregate demand. This is why the GDP formula is actually the same as the formula for calculating aggregate demand. Because of this, aggregate demand and expenditure GDP must fall or rise in tandem.

However, this similarity isn't technically always present in the real world—especially when looking at GDP over the long run. Short-run aggregate demand only measures total output for a single nominal price level, or the average of current prices across the entire spectrum of goods and services produced in the economy. Aggregate demand only equals GDP in the long run after adjusting for price level.

The expenditure method is the most widely used approach for estimating GDP, which is a measure of the economy's output produced within a country's borders irrespective of who owns the means to production. The GDP under this method is calculated by summing up all of the expenditures made on final goods and services. There are four main aggregate expenditures that go into calculating GDP: consumption by households, investment by businesses, government spending on goods and services, and net exports, which are equal to exports minus imports of goods and services.

The Formula for Expenditure GDP is:

GDP = C + I + I + ( X - M )
Where:

C = Consumer spending on goods and services
I = Investor spending on business capital goods
G = Government spending on public goods and services
X =  Exports
M = Imports

Precautions Taken While Applying the Expenditure Method

3. Since the production value of final goods is included, the expenses for any intermediate goods are not considered. Otherwise, a single expense will be counted twice, causing the national income to inflate inaccurately.
4. The transfer payments do not add value to the economy of a nation; hence, they should not be included.
5. The purchase of second-hand goods is not included since they do not affect the total value of produced goods and services. However, if the purchase of second-hand goods involves brokerage, the brokerage paid is included in the expense calculation.
6. When assets such as bonds and shares are procured, it signifies a change in ownership and does not affect the value of goods and services; hence, the transactions are not involved in expense calculation. However, the brokerage paid for the transfer of shares is considered while using the expenditure method.
7. Services provided by the government and non-profit organizations and the expenses incurred for the production of any good that is used for self-consumption are considered in the national income calculation.

$\begin{aligned} &GDP = C + I + G + (X - M)\\ &\textbf{where:}\\ &C = \text{Consumer spending on goods and services}\\ &I = \text{Investor spending on business capital goods}\\ &G = \text{Government spending on public goods and services}\\ &X = \text{exports}\\ &M = \text{imports}\\ \end{aligned}$