Expenditure Method and Income Method

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The availability or utilisation of resources is not the only factor that leads to a generation of economic wealth of the country. In terms of economic wealth, national income relates to the total aggregate amount of income that is earned by the state, both within a nation or an outside territory. 

Before proceeding further, with methods of national income accounting, here are a few concepts that one needs to know. 

A consumer includes such enterprises or individuals that buy services or goods for industrial, household or personal use.

Final goods are such items that will not be made to undergo any further stage of production and meant for last use.

When goods are subjected to further production, their original characteristics are lost and subsequently transformed into other commodities. 


What is National Income?

National Income is also termed as National Income at factor cost indicating a total amount of income that is earned by resources for the corresponding contribution towards labour, land, capital as well as organisational ability.

The methods of national income for computation would have to necessarily take into consideration the sum of the income accrued from production factors in the form of wages, rent, profit and interest. 

The National Income Formula may comprise of:

National Income = Net National Product + Subsidies – Indirect Taxes

Or, Gross National Product – Depreciation + Subsidies – Indirect Taxes

Or, National Income = C + G + I + (X – M) + NFIA – Depreciation – Indirect Taxes + Subsidies 

[Where, 

C = Consumption

G = Government expenditure 

I = Investment

X – M = Export minus Import

NFIA = Net Factor Income from Abroad]

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On dividing the National Income by population, the per capita income can be found out. The above figure shows that per capita income in 2019 has grown at the fastest rate reaching 11.1%.

The methods of national income accounting include both income and expenditure methods for calculation.


Income Method of Calculating National Income

The income method formula takes into consideration that measurement of National Income is representative of the flow of income factor. The four elements of production in this regard include:

  1. Land (which receive rent)

  2. Labour (which receive salary/wages)

  3. Capital (which receive interest)

  4. Entrepreneurship (which receive profit in the form of remuneration)

The Formula of Income Method is:

National Income = Employees’ compensation + Net income + Operating surplus (W + R + P + I) + Net Factor Income generated from abroad

[Where,

W = Salaries and Wages

R = Rental income

P = Profit 

I = Mixed Income]


Expenditure Method of National Income

The expenditure method is one of the effective ways of national income accounting in which the measurement of the same is taken as a flow of expenditure from government consumption, net exports and gross capital formation.

The Formula is –

National Income = C + G + I + NX

[Where,

Household consumption is represented by C

Government expenditure is represented by G

Investment expense is represented by I

Net exports are represented by NX]

If you seek to know more about methods of national income accounting, you are advised to attend our online classes. You can avail solved questionnaires, study materials in PDF format and a host of other resources.  

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FAQ (Frequently Asked Questions)

Q1. What is understood by National Income?

Ans. National income pertains to a monetary aggregate value of all the goods and services that are produced within a particular financial year. It essentially encompasses the result of all the economic activities. The value of such produced goods and services is assessed against the market price. The national income formula is:

National income = Compensation + Rent + Profit + Interest + Mixed income 

As indicated in this formula, compensation is the wages and salaries paid to labour. Rent is the money paid for land use and profit includes money generated by a business. Interest accrues on capital that is borrowed and mixed-income relates to the income from farming, self-employment and sole proprietorship among others. 

Q2. What is the income method of calculating National Income?

Ans. The income method of national income undertakes the measurement of the latter concerning the payments that are made as wages, rent, profit and interest within an accounting year. All the generated incomes from the producing units are added up in the domestic economy in a given financial year. 

The main steps that are involved in this specific calculation include – (1) identification of such enterprises employing different production factors like labour, land, enterprise, capital (2) Classification of payments in various categories like wages, rent, profit, interest and mixed-income (3) Estimation of the amount of factor payments (4) Summation of all the factor payments done within the domestic territory. 

Q3. What is the expenditure method of National Income?

Ans. One of the methods of national income accounting is through expenditure. The expenditure method is the most common way to calculate national income. The expenditure method formula for national income is C + I + G (X - M), where consumer spending is denoted by C, investment is denoted by I, government spending is denoted by G, X stands for exports and imports is represented as M.

The primary components in the expenditure method include – (1) consumer spending (2) government expenditure (3) business investment. Business investment can be further categorised into (a) gross fixed capital (b) inventory investment (c) net exports.