Introduction
Understanding the basic concepts of income and expenditures, assets and liabilities, profit and loss are of high importance not only for the examination purposes but also for all the proper functioning of organizations and their success. Vedantu hence provides you with an article that will help you understand more regarding the Expenditure Method and Income Method that will help you not only as a part of the syllabus but will also help you understand its application that will be needed in the future work environment. These concepts also govern some of the important aspects of the economy and hence if you would like to know more about the economy it is safe to say that you need to understand the basics of Expenditure Method and Income Method.
Before proceeding further, with the Expenditure and Income method of calculating national income, let us know what National Income is?
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 labor, land, capital as well as organizational 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:
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]
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 the measurement of National Income is representative of the flow of income factor. The four elements of production in this regard include:
Land (which receive rent)
Labor (which receive salary/wages)
Capital (which receive interest)
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 of solved questionnaires, study materials in PDF format, and a host of other resources.
FAQs on Expenditure Method and Income Method
1. What is understood by National Income?
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.
2. What is the income method of calculating National Income?
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.
3. What is the expenditure method of National Income?
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.
4. What is the meaning of income methods?
The income methods indicate the total output of a nation to the total factor income that has been received by the residents or the citizens of that particular nation. The main types of factor income that are available can be provided as follows:
Employee compensation includes the cost of fringe benefits including unemployment, health, and retirement benefits
Interest that has been received net of interest that has been paid.
Rental income for the use of real estate including the net expenses of landlords.
Royalties are paid in exchange for the use of intellectual property and extractable natural resources.
All of the remaining value will be added that is generated by the firms and will be termed as residual or profit or business cash flow.
5. What is the meaning of expenditure methods?
Expenditure in economics refers to spending. This type of spending also has another word called demand. The total amount that is spent or the demand that is calculated in the economy is called the aggregate demand. This is why the GDP formula is eventually similar to the formula that is used in calculating the aggregate demand. However, this similarity is not so evident in the real world especially when you take a look at the GDP in the long run. This method is one of the most widely used methods for measurements of GDP which is also called the measure of the economy’s output produced within a country’s border which is irrespective of the one who owns the means of production.
6. What are the limitations of GDP measurements?
GDP, which can be easily calculated by various methods, including the expenditure method, is used in the measurement of a country’s standard of living and economic health. However, critics such as the Nobel prize-winning economist Joseph Stiglitz warn people that GDP should not be taken as an all-encompassing indicator of a society’s progress since it ignores one of the most important factors that tend to make people happy. For example, while GDP can consider all the monetary values that the country has earned it will not be able to measure the success of the country in terms of humans and their happiness.
7. What is meant by the output approach?
The output approach mainly focuses on finding out the total output of a nation by directly measuring the total value of all goods and services that are produced by a nation. As the method of production of a good and service takes up a lot of complicated multiple stages, only the final value of the good or service included will be considered during the total output. This helps take out the issue which is also called double-counting where the total value of a good that is included will be more than once in national output as it is counted multiple times at different stages of production.
8. What are the types of aggregate expenses that are used to measure GDP?
Four different types of aggregate expenses are used to measure GDP as mentioned in the Vedantu NCERT Solutions for Commerce and can be provided as follows:
1. Consumer consumption:
It is seen that about two-thirds of the GDP constitutes consumer spending. This includes all the cost that has been incurred by the citizens who are present within the country’s border or outside. Consumer spending that is done by several customers can be categorized into the following:
Purchasing perishable and non-perishable goods
Procuring services
2. Private investments:
These investments by businesses include capital expenditures on various assets and can be categorized into two as follows:
Gross fixed capital
Inventory investment
3. Government Spending:
Both the state and federal governments of a country will incur expenses for providing the essential commodities, education, healthcare, and other necessities that are needed by the citizens belonging to the country.
4. Net exports:
The total difference that is seen in the value of a country’s total export and total import in one fiscal year is termed as net exports.