- 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 by 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.
- In this method, the national income is arrived at by summing all the money received by 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 by 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.