Question

Explain the income method and expenditure method of measuring national income.

Answer in detail:

Explain the income method and expenditure method of measurement of national income

Answer 1

National Income is one of the important subject matter of macroeconomics. The total income of the nation is called national income. In real terms, national income is the flow of goods and services produced in an economy during a year. There are three methods of measuring national income.

• Income Method:
  

1. This method of measuring national income is also known as the factor cost method. This method estimates national income from the distribution side.
2. GNP can be treated as the sum of factor incomes, earned as a result of undertaking the economic activity, on the part of resource owners and reflected in the production of the total output of goods and services during any given time period.
3. Thus, GNP, according to the income method, is calculated as follows:
   NI = R + W + I + P + MI + (X–M)
   Where,
   NI = National income (GNP)
   R = Rent
   W = Wages
   I = Interest
   P = Profit
   MI = Mixed-Income
   (X–M) = Net income from abroad.
4. In India, the National Income Committee of the Central Statistical Organization uses the income method for adding up the income arising from trade, transport, professional and liberal arts, public administration and domestic services.

• Expenditure Method:
  

1. This method of measuring national income is also known as the Outlay Method.
2. According to this method, the total expenditure incurred by the society, in a particular year, is added together. Income can be spent either on consumer goods or on capital goods.
3. Thus, we can get national income by summing up all consumption expenditure and investment expenditure made by all individuals, firms as well as the government of a country during a year.
4. Thus, GNP according to the expenditure method, is calculated as follows:
   NI = C + I + G + (X–M) + (R–P)
   Where,
   C = Private Final Consumption Expenditure
   I = Gross Domestic Private Investment Expenditure
   G = Government Final Consumption and Investment Expenditure
   (X–M) = Net Foreign Investment/Net Exports
   (R–P) = Net receipts

i. Private Final Consumption Expenditure (c)

Private Final Consumption Expenditure (C) by households includes expenditure on:

1. Non-durable goods which are used immediately (E.g.: food)
2. Durable goods which are generally used for longer period of time (E.g.: car, computer, television set, washing machine etc.)
3. Services like transport services, medical services, etc

ii. Gross Domestic private investment Expenditure(I)

It refers to expenditure made by private businesses on replacement, renewals and new investment.

iii. Government Final Consumption And Investment Expenditure (G)

1. Government's final consumption expenditure: It refers to the expenditure on various administrative services like, law and order, defence, education, health etc. 
2. Government's investment expenditure: It refers to the expenditure on creating infrastructural facilities like construction of roads, railways, bridges, dams, canals. These facilities are used by the business sector for production of goods and services.

iv. Net Foreign Investment/Net Exports (X-M)

It refers to the difference between exports and imports of a country during a period of one year.

v. Net Receipts

It refers to the difference between expenditure incurred by foreigners on domestic goods and services (R) and expenditure incurred abroad by residents on foreign goods and services (P).