Me and a friend of mine have recently gotten into a debate over the British Empire. Specifically, over its economics benefits. He contends that the British Government was primarily funded by the British Taxpayer in the Home Isles and that a majority of revenue made in the colonies stayed with the local colonial governments, while I contend that the British Treasury was primarily filled by the profits from the colonies. This is relating to the later Empire around the Second Industrial Revolution btw.
Basically, I've come to ask which of us is right and if theres any sources or reading on this topic. Specifically, how much of the British GDP and the money spent by the government came from the colonies such as India.
The question of GDP can be answered simply: GDP is a measure of Gross Domestic Product and thus only included what was produced in Britain. One way of calculating GDP is the expenditure method, which involves adding up all expenditure in Britain over the relevant time period on consumption (private and government), investment, and exports, and then subtracting imports. A better term for what you are thinking of would be something like British national income, which includes income earned by British residents regardless from their ownership of assets and labour, regardless of where in the world this income was produced.
In 1913, imports supplied 25 to 30% of Britain's national income, however this figure is for all imports from all countries, colonies or not, including neighbouring European countries and the USA (a major wheat exporter). The UK in the late 19th and early 20th century was actually in trade deficit with the USA and continental Europe, and in surplus with its major colonies of India and Australia, along with several other developing economies like Turkey. Basically, the UK was importing food and raw materials from Canada, the USA and continental Europe, and exporting manufactured goods to primary producing companies (such as India and Turkey) and exporting financial services to everyone.
As for the British government budget, it's surprisingly hard to find detailed historical statistics for this in the 19th century, but any contribution was fairly small. There's been some histographic debate over the importance of Britain's colonies to the prosperity of Britain, but no one indicates that colonies made a major contribution of the colonies to the British government revenue. The strongest I've seen is that India paid for its own "defence" (it's a bit weird to describe "keeping India under British control" as defence), and made a small contribution beyond that. (Gartzke, Rohner, 2011).
The economic historian Deirdre McCloskey (2006) made the following summary:
The cost of protecting the Empire devolved almost entirely on the British people. (A century earlier the British had likewise paid for the defense of the first empire, in what is now the United States; the colonials refused to pay as little as a small tax on tea for imperial defense.) British taxpayers 1877-1948 paid for the half of naval expenditure that was for imperial defense, a by no means negligible part of total British national income each year.
...
Did acquisition of Empire, then, cause spurts in British growth? By no means. Indeed, at the climax of imperial pretension, in the 1890s and 1900s, the growth of British real income per head notably slowed.
So, sorry to say it, but your friend has the stronger argument.
Sources
Floud and McCloskey, 1994, "The Industrial Revolution: A Survey," a new essay, in Floud and McCloskey, eds., The Economic History of Britain, 1700-Present, 2nd ed.
Clark, O'Rourke and Taylor, 2014, The growing dependence of Britain on trade during the industrial revolution, Scandinavian Economic History Review
"Foreign Trade: Competition and the Expanding International Economy, 1820-1914," Chapter 17 in Floud and McCloskey, The Economic History of Britain, 1700-Present (1981), Vol. 2, pp. 50-69; reworked in the second edition; Harley used it in the third edition by Floud and Johnson, eds. http://www.deirdremccloskey.com/docs/graham/britain.pdf
Deidre McCloskey, 2006, Keukentafel Economics and the History of British Imperialism, South African Economic History Review 21 (Sept 2006): 171-176. http://www.deirdremccloskey.com/docs/imperialism.pdf
L.E. Davis, RA Huttenback, 1977, Public expenditure and private profit: budgetary decision in the British Empire, 1860-1912, The American Economic Review, 1977 - JSTOR, https://www.jstor.org/stable/1815917?seq=1#metadata_info_tab_contents
Offer, Avner. 1993. The British Empire, 1870-1914: A Waste of Money? The Economic History Review 46 (2): 215–15. doi:10.2307/2598015.
GARTZKE, ERIK, and DOMINIC ROHNER. 2011. The Political Economy of Imperialism, Decolonization and Development. British Journal of Political Science 41 (3): 525–56.