Explain explain the income and expenditure method of measuring national income and also difficulties in measurement of national income
Answers
Measurement of National Income
There are three ways of measuring the National Income of a country. They are from the income side, the output side and the expenditure side. Thus, we can classify these perspectives into the following methods of measurement of National Income.
Methods of Measuring National Income
◉Product Method
◉Income Method
◉Expenditure Method
1. Product Method
Under this method, we add the values of output produced or services rendered by the different sectors of the economy during the year in order to calculate the National Income.
In this method, we include only the value added by each firm in the production process in the output figure.
Hence, we use the value-added method. The value-added output of all the sectors of the economy is the GNP at factor cost.
However, this method is unscientific as it adds the value of only those goods and services that are sold in the market or are available for sale in the market
2. Income Method
Under this method, we add all the incomes from employment and ownership of assets before taxation received from all the production activities in an economy.
Thus, it is also the Factor Income method. We also need to add the undistributed profits of the private sector and the trading surplus of the public sector corporations.
However, we need to exclude items not arising from productive activities such as sickness benefits, interest on national debt, etc.
3. Expenditure Method
This method measures the total domestic expenditure of the economy. It consists of two elements, viz. Consumption expenditure and Investment expenditure.
Consumption expenditure includes consumption expenditure of the household sector on goods and services and consumption outlays of the business sector and public authorities.
Investment expenditure refers to the expenditure on the making of fixed capital such as Plant and Machinery, buildings, etc.