Assuming a flour company purchases its raw material at the cost of $8.55 million on an average scale of 6 to 7 years, in the company’s account, this purchase will be categorized as expenditure or specially documented as $8.55 million capital.
The purpose of this article is to briefly discuss the four major Categories of Expenditure. In the concept of microeconomics, the four major Categories of Expenditure are Consumption, investment, government, and net exports.
There are mainly referred to as the four major Categories of Expenditure due to their relevance in accounting and finance.
The four major Categories of Expenditure
Each of these four categories is a degree of economic growth and activity and determines the gross domestic product (GDP) of the economy in view. these four expenditures.
As such if there is a total percentage increase in the market value of consumption, investment, government purchases, and net exports four expenditures, the wealth of the nation escalates, the private and public business will spread and investors will be attracted.
On the other hand, if there is a total percentage decrease in the market value of consumption, investment, government purchases, and net exports four expenditures, the wealth of the nation will be negatively affected as a business will worsen.
Often times if it is not rapidly managed, the GDP of that economy may fall and in extreme cases, this may result in recession.
This reveals that consumption, investment, government purchases, and net exports have a significant relationship with the market value of every good and service.
In the analysis of Nigeria’s GDP, consumption usually sums up to about two-thirds of the total consumption in the nation.
Consumption is consist of two aspects namely durable and non-durable. Consumption activities are determined by interest rates.
For clarity, let’s assume that there are two customers, customer A, and customer B. If customer A consumes less but or starts to reserve some cash in the form of saving money probably because of increased interest rates, on the other hand, customer B reduces his savings by increasing his consumption.
When interest rates fall, customer B will have greater discretionary money or credit, while customer B will have greater returns on the value of money due to increased interest rates on credit and this will automatically reduce the purchasing power of goods and services.
Investments can simply be referred to as assets. When the total investment decline, that economy is bound to experience a recession.
Investment can be generally grouped as the total number of residential home sales, the value of money in the stock market, money market figures including savings, and the value of business inventory accumulated over a period of time.
Investment can be calculated as;
Total investment equals fixed investment, plus inventory investment, plus residential investment.
Government spending is a determinant of the money supply. When government spending increases, the money supply will increase.
This means that small and medium-scale enterprises will accrue more wealth and their customers will accommodate more cash to spend on goods and services.
When government spending goes declines, small businesses will have less wealth due to losing contracts and customers will have less wealth for spending.
3. Net Exports
Exports can be referred to as the total amount of goods and services made in a particular country that foreign agencies and foreign companies.
For instance, in the imports of goods and services, one of the measures to account for net exports is to subtract import procurements.
Net Exports are calculated by Economists as: Total of all exports minus all imports and Imports are subtracted from GDP.
Local and state governments comprise the federal government and its allocation. When government expenditure is greater than the revenue (which is mainly generated through taxes and other channels of income), that economy will have a deficit causing an increase in interest rates. Conversely, when government expenditure is less than the revenue, this will lead to a surplus.
Conclusively, the four categories of expenditure are vital and documentation is made by every economy to exist to maintain adequate control over their economic transactions and ensure payment of money or incurrence of liability in exchange for goods or services, this is expenditure.