Explain the expenditure method of measuring national income. IB Economics/Macroeconomics/Measuring National Income 2019-01-05

Measures of national income and output

Different concepts of National Income 1. Many African countries in particular have trouble measuring the size of their relatively large subsistence economies and unrecorded economic activity. Soviet system used not to count them at all as they are not producing anything tangible. National income of a country is calculated by following any one of the three methods. 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.

Expenditure Method of National Income Homework Help in Macroeconomics

Such information is highly useful for devising planning programmes. The transaction between the farmer, miller and baker are intermediate transactions. National income method includes the income from employment and from self-employment; gross trading profits of companies, public corporations and general govn enterprises; rent and the imputed charge for the consumption of non-trading capital benefits from living own houses and stock appreciation gain in value. All of these approaches give the same value of the national income. Since factor incomes arise from the production of goods and services, and since incomes are spent on goods and services produced, three alternative methods of measuring national income are possible. Second, the rifer turns it into flour and sells it to the baker. The various advantages of national income estimates are explained below: 1.

Advantages of Measuring National Income

Income approach In income approach, we find the different. Same way imports are subtracted. National product is usually used synonymous with National income. In many countries, the data of production of only important industries are known. What is the distinction between current and real terms of these entities? 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. The choice of above three methods depends on the level at which the national income is calculated.

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

Measuring national income at may overcome this problem at the risk of overvaluing basic goods and services, for example subsistence farming. The product method is used at the product level. The modern definition includes all the features given by Simon Kuznet. As a broad rule, all purchases charged to current expense by business are treated as intermediate goods added to stock within the accounting period represent an addition to capital and though. In final expenditure method, national income is defined as the sum of final expenditure on goods and services produced within the domestic territory of a country within one year.

Explain the Various Methods of Measuring National income

Primarily there are three methods of measuring national income. This involves drawing a distinction between final and intermediate purchases and transaction. Only incomes which have been earned in return for productive services are included. Subsistence sector growing for own sake can also contribute considerably to the national welfare in less developed countries. The receipts from the sale of second-hand goods should not be treated as a part of national income. Like the value added method, the first step in income method is also to identify the productive enterprises and then classify them into various industrial sectors such as agriculture, fishing, forestry, manufacturing, transport, trade and commerce, banking, etc.

Explain the difference between the three main methods of calculating national income

We count all goods and services produced by the nationals of the country or businesses owned by them regardless of where that production physically takes place. It explains the causes and consequences of inflation and deflation and their effects on people. If net foreign investment is taken into account, we would get national product rather than domestic product. Intermediate consumption which is the value of goods such as raw materials, fuels purchased from other firms 2. This includes both black markets selling illegal goods and informal markets selling legal goods illegally to circumvent price restrictions. Imports M is the expenditure by residents on foreign products.

Method of Measuring National Income

National and Domestic Concepts The term national denotes that the aggregate under consideration represents the total income which accrues to the normal residents of a country due to their participation in world production during the current year. Almost all countries have been devising and implementing various plans for the economic progress of their economies. Rent and also royalty, if any. Read Also: Income Method of Measuring National Income This method is used to measure national income at distribution level. Net Exports X — M : It refers to the difference between exports and imports of a country during a period of one year. This is acceptable to economists, because, like income, the total value of all goods is equal to the total amount of money spent on goods. Only the final goods and services are taken into account.

Advantages of Measuring National Income

Levels of income, savings, investment can be known : National income estimate present correct data and information regarding the levels of savings, investment, income and consumption. Measuring National Income 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 investment adjusted for imports and exports; or a sum of value added by the various producing sectors in the country adjusted for factor income payments to and from abroad, care must be taken with regard to the correction for depreciation of capital assets because the various elements in the aggregate are either 'gross' or 'net'. The self employed persons receive their income in more than one form and therefore it is termed as mixed income. The third step is to measure factor payments. Definition of National Income The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation.