Approaches used in measuring national income

Business studies study module
  • Expenditure Approach.

National income is arrived at summing expenditure on all final goods and services (that have reached the final stage of production). Such expenditure is divided into:

  • Expenditure on consumer goods ( C)
  • Expenditure on capital goods (I)
  • Expenditure government (G)
  • Expenditure on net exports (X – M)

Therefore national income = C+I+G+(X – M)

Problems associated with expenditure approach

  • Lack of accurate records particularly in the private sector.
  • Approximation of expenditure of the subsistence sector.
  • Difficulty in differentiating between final expenditure and intermediate expenditure
  • Double counting may exist
  • Fluctuating exchange rates may cause problems in the valuation of imports and exports.
  • Income approach
  • In this method, the national income is arrived at summing all the money received those who participate in the production of goods and services.
  • Such incomes are in the form of rewards to the production factors (wages, rent, interest and profits).
  • Public income is also taken into account i.e. it is the income received the government from its investments (Parastatals, joint ventures).
  • Transfer payments are excluded since they represent a redistribution of incomes from those who have earned them to the recipient’s e.g.
  • National insurance schemes.

Problems related to this method

  • Determination of what proportion of transfer payments constitute in the income of a country.
  • Inaccurate data may exist since business people may not tell the truth about their income in order to evade tax.
  • Price fluctuations may make national income determination difficult.
  • Income from illegal activities is not captured.
  • Valuation of income from subsistence economy may be difficult e.g. housewives.

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