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Question
Answer the following question:
State the precautions while using expenditure method to measure national income.
Solution
Precautions regarding calculation of national income by the expenditure method are:
i. National income estimation should include only the final goods and services. Intermediate consumption expenditure should not be included.
ii. Expenditure on the purchase of second hand goods should not be included in the national income estimation of the current accounting year. This is because it has already been included in the national income of the accounting year in which these goods were originally purchased.
iii. Expenditure on shares and bonds is not included. This is because these shares and bonds are mere financial assets and do not reflect any production activity of the goods or services.
iv. Imputed value of the goods and services produced for self consumption are included.
v. Expenditure on transfer payments by the government should not be included. This is because such payments are not related to any production activity in an economy.
vi. The value of subsidies should be included.
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