Explain the expenditure method of measuring national income. Expenditure Method of National Income Homework Help in Macroeconomics 2019-01-05

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3 Alternative Methods Used for Measuring National Income

explain the expenditure method of measuring national income

Income method measures the incomes received by different factors of production Land, Labour, Capital, Entrepreneurs. It focuses on finding the total output of a nation by finding the total amount of money spent. It is wise to use any method in measuring national income. It may be positive or negative. Also, expenditure done on second hand goods and bonds and shares must not be included in national income as they cause error in actual value of national income.

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Why do all three methods of calculating the national income give the same value?

explain the expenditure method of measuring national income

We exclude: Transfer payments e. Purchase of second-hand goods will not be included as such expenditure has already been included when they were originally purchased. The various advantages of national income estimates are explained below: 1. It differs from personal income by the amount of direct taxes paid by individuals. One problem for instance is that goods in inventory have been produced therefore included in Product , but not yet sold therefore not yet included in Expenditure. This is known as the shadow economy.


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Advantages of Measuring National Income

explain the expenditure method of measuring national income

Government produces goods and services with the aim of social welfare without any intention of earning profits. Subsistence sector growing for own sake can also contribute considerably to the national welfare in less developed countries. Hence this method is employed along with other methods to arrive at the national income. National income estimates provide valuable information and guidance for formulating the economic plans. It is important to understand that purchase of shares and debentures, either old or new, is not included in investment. Economic welfare depends to a considerable degree on the level of national income and the average standard of living of the people. The net incomes earned by the factors of production in the form of rent, wage, interest and profit aggregated but incomes in the form of transfer payments are not included in the national income.

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IB Economics/Macroeconomics/Measuring National Income

explain the expenditure method of measuring national income

According to this approach value of all final goods and services produced in primary, secondary and tertiary sector are included and the value of all intermediate transactions are ignored. Purchase of financial assets shares, debentures, bonds etc. According to income method, the net income payments received by all citizens of a country in a particular year are added up. The expenditure by productive enterprises on capital goods and inventories or stocks. International comparisons are even more difficult as the exchange rates fluctuate after 1971, prices and inflation differ in different countries, transport costs must be included, there are different levels of subsistence economy and the govn expenditure patterns differ. Expenditure on Intermediate Goods will not be included in the national income as it is already included in the value of final expenditure. Gross and Net Concept Gross emphasizes that no allowance for capital consumption has been made or that depreciation has yet to be deducted.


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Method of measuring National Income ~ Economics

explain the expenditure method of measuring national income

Even the statistical information regarding the enterprises in the organised sector is sketchy and unreliable. Corporate profit tax that is, tax on income of the companies should not be separately included as it has already been included as a part of profits. Income approach In income approach, we find the different. The one great advantage of this method is that it reveals the relative importance of the different sectors of the economy by showing their respective contributions to the national income. You May Also Love to Read: Expenditure Method of Measuring National Income Under this method of measuring national income, final expenditure on gross domestic product at market price is added together.

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Advantages of Measuring National Income

explain the expenditure method of measuring national income

Most of all the data is not meant for national income accounting, it is a by-product of other institutions and can thus be inadequate in several cases. They indicate whither the economy is marching along the path of progress. They reveal whether the economy is moving forward or declining or in a stable condition. This is the net annual income or revenue of the country or the true national dividend. Must Read: Method of Measuring National Income The that are produced by the production units consist of four factors of production, that are, land, labour, capital and entrepreneurship. It is included as an investment item because it represents the goods produced but not used for current consumption. We add up the following types of expenditure by households, government and by productive enterprises to obtain national income.

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Expenditure Method for Measurement of National Income

explain the expenditure method of measuring national income

Expenditure Approach This method is known as the final product method. Different concepts of National Income 1. T, S, and Ms are all termed leakages L. They also inform the significance and contribution of different sectors to the national dividend. Value added measures the flow that leaves productive sector, national income measures the amount received by households and final demand or expenditure is the amount reaching the productive sector again. The product method looks at the economy on an industry-by-industry basis. All of these approaches give the same value of the national income.

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IB Economics/Macroeconomics/Measuring National Income

explain the expenditure method of measuring national income

This method measures national income as sum total of final expenditures incurred by households, business firms, government and foreigners. There expenditures include personal consumption expenditure, net domestic investment, Govt, expenditure on goods and-services, and net foreign investments, Govt, expenditure and net foreign investment. Changes in price level : National income estimates also reveal the facts regarding the changes in price level. Value of money for all final goods and services is produced in an economy during a year. Income Method: This method approaches national income from distribution side.

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