Measurements of national income product method, value. Explain the output method of measuring national income. National income of a country is calculated by following any one of the three methods. To calculate gdp by this method, lets categorize expenditures first. Ncert solutions for class 12 macro economics chapter2 national income and related aggregates ncert textbook questions solved 1. Wages, proprietors incomes, and corporate profits are the major subdivisions of 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.
Ib economicsmacroeconomicsmeasuring national income. This market value method is called national income accounts model. Let us say that you buy a ham and mushroom pizza from dominos at a price of. Finally, the expenditure approach measures activity by adding the amount. National income accounting important questions for class 12 economics methods of calculating national income. Double counting means that a particular commodity or service like raw material or labour, etc.
However, while estimating the value of national product by the expenditure method we must only record final expenditures. 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. Measurements of national income read about product method, expenditure method and valueadded method. How can we measure the total activity of millions of economic agents. Measuring gdp using the income approach and the expenditure approach. Expenditure, economists develop three approaches to measure gnp. Aggregate demand and expenditure digital economist. Pdf national income accounting and circular flow of income. Methods of calculating national income i income method ii expenditure method iii product method or value added method or output method. From the expenditure side national income is calculated by adding up the flows of expenditure needed to purchase the nation s output. This involves drawing a distinction between final and intermediate purchases and transaction. 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. 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. The income approach and the expenditure approach to. Ncert solutions class 12 economics national income accounting. Another method of measurement of national income is expenditure 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.
But expenditure method is difficult method because of the reliability of data. Explain the difference between the three main methods of. Important questions for class 12 economics methods of. Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments. This is the sum of expenditure made for final consumer goods and investment demand, and for net export. On this basis, national income has been defined in a number of ways.
Expenditure method for measurement of national income. Value added is the increase in the value of goods or services as a result of the production process. For example, purchase of vegetables by a restaurant, expenses on electricity by a factory are not included as they. Problem of definition the major problem arises when defining the composition of national income. 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. Under this method, national income is calculated by adding the expenditure made by all the individuals or sectors of an economy. Several economists like marshall, pigou, fisher, simon kuznets offered valuable definitions on national income. Measurement difficulties of national income businesstopia. Income approach to gdp, and other issues relating to the compilation of.
National income is the total value of goods and services produced in a country during a year. 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. 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. The three approaches used for measuring national income give the same result. 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. Expenditure method of measuring national income youtube. The value of indirect taxes subsidies was rs 150 crores and national income was rs 850 crores. 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. Download measurements of national income notes pdf. 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. Since all domestically produced goods and services are purchased for final use either by consumers for consumption or by producers for investment. Conceptual difficulties the conceptual difficulties in measuring national income include.
National income accounting describes distribution of national income in. Business income and expenditure statement sale s or revenues sales or revenues other income income from supplementary. This method is also known as income disposal method. Expenditure method of measuring national income adham faiq. There are three main ways of measuring a countrys gdp. Suppose the gdp at market price of a country in a particular year was rs 1,100 crores. This total final expenditure is equal to gross domestic product at market price, i. There are three methods of measuring price elasticity of demand. 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. The expenditure method is a system for calculating gross domestic product gdp that combines consumption, investment, government spending, and net. Income method is used to find the contribution of services sector.
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. The following precautions need to be taken for correct estimation of national income by expenditure method. The sum of final expenditures in an economy must be equal to the income received by all the. Ideally, national income includes all the goods and services. Chapter 2 national income university of washington. 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. National income economics, upsc, ias upsc notes edurev. 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. Second, there always exists the fear of the mistake of double counting, and hence the national income cannot be correctly estimated. National output national expenditure aggregate demand national income. Production method, income method and expenditure method. The income method works by summing the incomes of all producers within the boundary. 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.
It is net national product nnp at factor cost fc it does not include taxes, depreciation and nonfactor inputs raw materials. National income accounting definition investopedia. Since what they are paid is just the market value of their product, their total income must be the total value of the product. Income method and product method are often employed for calculating national income. National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure.
Why three methods of computingmeasuring national income are equal. In common parlance, national income means the total value of goods and. Gdp is a measure of the economic prosperity of a country. We have to exclude all the expenditure on intermediate goods and services. What are the strengths and weaknesses of each method of measurement. What precautions should be taken in estimating national. Three approaches to measuring national income businesstopia. The total of all factor incomes is called national income. National income accounting involves both conceptual as well as statistical difficulties. Ncert solutions for class 12 macro economics national. Explain the difference between the three main methods of calculating national income by income, by expenditure and by output. National income cannot be measured to a perfect number. Thus based on the consumption, expenditure, and trade data, there are three methods that you can use to measure the national income. For example, governments spend money purchasing buildings.
Factor income earned by factors of production is spent in the form of expenditure on purchase of goods and services produced by firms. Explain the various methods of measuring national income. Value added value of production value of intermediate goods. Ncert solutions class 12 economics national income accounting 7. 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.
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. Gdpe expenditure expenditure measurement is about the cost the revenue i gonna assume you have learnt business chapter in microeconomics cost comp. National income is the total value of a countrys final output of all new goods and services produced in one year. Expenditure approach 1 final product method 1 for whom to produce 1. The aggregate expenditure approach to the measurement of gdp breaks up gdp in 4. Consequently, the national income cannot be calculated correctly. Product method is used in agriculture and industry sectors. Measurement of national income value added, income method and expenditure. This method measures national income as sum total of final expenditures incurred by households, business firms, government and foreigners. 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.
But you can always estimate the income based on the data available to you. In an open economy, the demand for domestic output is made up of four components. Income takes into account wages and salaries, rent, interest, selfemployed income and adds up to make total domestic income. According to this approach value of all final goods and services produced in primary, secondary and tertiary sector are included and the. Measuring the level and rate of growth of national income y is important for seeing. It includes spending by all levels of government on final goods and services. Final goods are those goods which are ready for final consumption. How to explain the methods of measuring national income. This is a structure for computing the gdp combines utilisation, investment, net exports and government expenditure. 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.
This method arrives at national income by adding up all the expenditure made on goods and services during a year. Methods of measurement income, expenditure, output. To avoid double counting, expenditure on all intermediate goods and services is excluded. Alternatively following items of expenditure should not be included. Definition, concepts and methods of measuring national income.
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