Chapter 2 national income university of washington. Consequently, the national income cannot be calculated correctly. Gdp is a measure of the economic prosperity of a country. Measurements of national income read about product method, expenditure method and valueadded method.
Explain the difference between the three main methods of. National income is the total value of a countrys final output of all new goods and services produced in one year. Economics lecture 3 class notes national income total value of final goods and services produced by the normal residents during an accounting year, after adjusting depreciation. The income approach and the expenditure approach to. Since all domestically produced goods and services are purchased for final use either by consumers for consumption or by producers for investment. Finally, the expenditure approach measures activity by adding the amount. Ncert solutions class 12 economics national income accounting. Another method of measurement of national income is expenditure method. Alternatively following items of expenditure should not be included. What precautions should be taken in estimating national. The expenditure method is a system for calculating gross domestic product gdp that combines consumption, investment, government spending, and net. To avoid double counting, expenditure on all intermediate goods and services is excluded. Suppose the gdp at market price of a country in a particular year was rs 1,100 crores.
National income economics, upsc, ias upsc notes edurev. Methods of calculating national income i income method ii expenditure method iii product method or value added method or output method. Since what they are paid is just the market value of their product, their total income must be the total value of the product. On this basis, national income has been defined in a number of ways. Income method is used to find the contribution of services sector. Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments. We have to exclude all the expenditure on intermediate goods and services. Several economists like marshall, pigou, fisher, simon kuznets offered valuable definitions on national income. The three approaches used for measuring national income give the same result. National income portrays itself as national product, national expenditure and national income, national product, national expenditure and national income thus form a circular flow and make it possible to measure national income in three different ways, namely, as a sum of incomes derived from economic activities, as a sum of final expenditure on consumption and. From the expenditure side national income is calculated by adding up the flows of expenditure needed to purchase the nation s output.
Business income and expenditure statement sale s or revenues sales or revenues other income income from supplementary. Value added value of production value of intermediate goods. The sum of final expenditures in an economy must be equal to the income received by all the. National income of a country is calculated by following any one of the three methods.
What are the strengths and weaknesses of each method of measurement. But you can always estimate the income based on the data available to you. This method is also known as income disposal method. Expenditure method expenditure method measures national income as aggregate of all the final expenditure on gross domestic product in an economy during a year. The income approach and the expenditure approach to measuring the gdp of a nation by jason welker gdp is generally understood to represent the health of a nations economy, and most people realize that if gdp is growing, things are going well, while if its falling things have turned sour in the economy. Ideally, national income includes all the goods and services. According to this approach value of all final goods and services produced in primary, secondary and tertiary sector are included and the. This market value method is called national income accounts model.
The following precautions need to be taken for correct estimation of national income by expenditure method. Income approach to gdp, and other issues relating to the compilation of. Why three methods of computingmeasuring national income are equal. Expenditure, economists develop three approaches to measure gnp. Production method, income method and expenditure method. Income method and product method are often employed for calculating national income.
National income accounting definition investopedia. Income takes into account wages and salaries, rent, interest, selfemployed income and adds up to make total domestic income. Expenditure method of measuring national income national income can also be measured as sum of expenditure on final goods and services less depreciation of capital assets. Ib economicsmacroeconomicsmeasuring national income. This involves drawing a distinction between final and intermediate purchases and transaction. Final goods are those goods which are ready for final consumption. There are three ways of calculating gdp all of which in theory should sum to the same amount national output national expenditure aggregate demand national income i the expenditure method aggregate demand ad the full equation for gdp using this approach is. The objective of this study is to test for the direction of causality between government expenditure and national income in nigeria using annual data for the period 19702005. Problem of definition the major problem arises when defining the composition of national income. Expenditure method of measuring national income youtube. Ncert solutions for class 12 macro economics national.
In common parlance, national income means the total value of goods and. Thus based on the consumption, expenditure, and trade data, there are three methods that you can use to measure the national income. For example, purchase of vegetables by a restaurant, expenses on electricity by a factory are not included as they. Wages, proprietors incomes, and corporate profits are the major subdivisions of income. National output national expenditure aggregate demand national income. National income accounting important questions for class 12 economics methods of calculating national income. Aggregate expenditure, income and the multiplier from our discussion of national income accounting, one method of calculating nominal gdp yn was through the expenditure approach such that. Expenditure method by this method, the total sum of expenditures on the purchase of final goods and services produced during an accounting year within an economy is estimated to obtain the value of domestic income.
Explain the various methods of measuring national income. Download measurements of national income notes pdf. Important questions for class 12 economics methods of. Measurements of national income product method, value. Explain the difference between the three main methods of calculating national income by income, by expenditure and by output. For example, governments spend money purchasing buildings. Aggregate demand and expenditure digital economist. National income accounting y a variety of measures of national income and output are used in economics to estimate total economic activity in a country or region. Expenditure method of measuring national income adham faiq. National income is the total value of goods and services produced in a country during a year.
Product method is used in agriculture and industry sectors. Expenditure method measures final expenditure on gross domestic product at market price gdp at mp during a period of account. For better understanding of the answer you must know few things what is national income. This method measures national income as sum total of final expenditures incurred by households. The main problem is whether to include the income generated within the country or even generated abroad in national income and which method should be used in the measurement of national income. Measuring gdp using the income approach and the expenditure approach. The reason is the market value of goods and services produced in a given period by definition is equal to the amount that buyers must spend to purchase them. Three approaches to measuring national income businesstopia. Ncert solutions class 12 economics national income accounting 7. Let us say that you buy a ham and mushroom pizza from dominos at a price of. This is a structure for computing the gdp combines utilisation, investment, net exports and government expenditure. The income method works by summing the incomes of all producers within the boundary.
A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Since factor incomes account for all of the market value of the goods produced, it must be that national income and national product are equal. Expenditure method for measurement of national income. Factor income earned by factors of production is spent in the form of expenditure on purchase of goods and services produced by firms. The expenditure method measures the national income as the sum total of expenditures made by individuals on personal consumption, firms on private investments, and government authorities on government purchases.
In an open economy, the demand for domestic output is made up of four components. National income accounting describes distribution of national income in. But expenditure method is difficult method because of the reliability of data. Expenditure approach 1 final product method 1 for whom to produce 1. This method measures national income as sum total of final expenditures incurred by households, business firms, government and foreigners. There are three main ways of measuring a countrys gdp. This total final expenditure is equal to gross domestic product at market price, i. Pdf national income accounting and circular flow of income. Explain the output method of measuring national income. Double counting means that a particular commodity or service like raw material or labour, etc. This method arrives at national income by adding up all the expenditure made on goods and services during a year.
The aggregate expenditure approach 4 government expenditure g national, state, and local governments purchase many goods and services, which are included in gdp as government spending. National income accounting is a bookkeeping system that a government uses to measure the level of the countrys economic activity in a given time period. Under this method, national income is calculated by adding the expenditure made by all the individuals or sectors of an economy. How can we measure the total activity of millions of economic agents. National income cannot be measured to a perfect number. National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. The aggregate expenditure approach to the measurement of gdp breaks up gdp in 4.
The total of all factor incomes is called national income. However, while estimating the value of national product by the expenditure method we must only record final expenditures. This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc. Ncert solutions for class 12 macro economics chapter2 national income and related aggregates ncert textbook questions solved 1. Economics class 12th chapters are being divided on the basis of topics so as to make it easy for the students to study only what they want and not. National income accounting is a branch of macroeconomics that captures the total flows of income as well as of goods and services within a certain period. Gdpe expenditure expenditure measurement is about the cost the revenue i gonna assume you have learnt business chapter in microeconomics cost comp. Measuring the level and rate of growth of national income y is important for seeing. The value of indirect taxes subsidies was rs 150 crores and national income was rs 850 crores. It is net national product nnp at factor cost fc it does not include taxes, depreciation and nonfactor inputs raw materials. Conceptual difficulties the conceptual difficulties in measuring national income include. It includes spending by all levels of government on final goods and services.