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:

  1. Expenditure on consumer goods ( C)
  2. Expenditure on capital goods (I)
  3. Expenditure by government (G)
  4. 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 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

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

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