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Expenditure method is also called Flow-of-Expenditure method, consumption and investment method, income Disposal method, etc.
Expenditure method measures the final expenditure on goods domestic product market prices during a year.This method measure the expenditure on GDPMP during a year.The various steps involved in the use of expenditure method are briefly summarized as follows: 1. First Step: It involves identification of economic units incurring final expenditure. Different economic units are:(i) Household sector(ii) Producer sector(iii) Government sector(iv) Rest-of-the world sector. 2. Second Step: It involves classification of final expenditure into the following categories:(i) Final Consumption Expenditure: (a) Private final consumption expenditure, and (b) Final consumption expenditure of the government(ii) Final Investment Expenditure: (a) Gross domestic fixed capital formation, (b) Changes in stocks, and (c) Net acquisition of valuables.(iii) Net exports:Exports minus imports 3. Third Step: It involves the measurements of final expenditure. The various components of final expenditure are measured as follows:To measure Private Final Consumption Expenditure, the volume of final sale of durable goods, semi-durable goods, non-durable goods and services to the consumer households and non-profit institutions serving households is multiplied by market prices (retail prices). The direct purchases of resident households made abroad are added. The direct purchases of resident non-resident households in the domestic market are deducted, i.e.,Thus, according to the expenditure method GDPMP = Private Final Consumption Expenditure + Expenditure + Government Final Consumption Expenditure + Gross Domestic Investment + Net Exports.
Under what conditions does the text explain that monetary policy is neutral? If it is neutral under these conditions, why is it still an important economic policy tool? Your answer
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