The various components of final expenditure are:
1. 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.
2. 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.
. Gross Domestic Capital Formation (GDCF) or Gross Investment:
It refers to the addition to capital stock of the economy. It represents the expenditure incurred on acquiring goods for investment by the production units located within the domestic territory.
There are two components of GDCF:
(i) Gross Fixed Capital Formation:
It refers to the expenditure incurred on purchase of fixed assets.
This expenditure is generally divided into three sub-categories:
(a) Gross Business Fixed Investment:
It includes expenditure on the purchase of new plants, machinery, equipment’s, etc.
(b) Gross Residential Construction Investment:
It includes expenditure on purchase or construction of new houses by the households.
(c) Gross Public Investment:
It includes expenditure on construction of flyovers, roads, bridges etc. by the government.
(ii) 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.
4. Net Exports (X – M):
It refers to the difference between exports and imports of a country during a period of one year.
