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NATIONAL INCOME

MEASUREMENT OF NATIONAL INCOME


USING EXPENDITURE METHOD

Submitted By:
Arpit Bansal
B.Com LL.B. (2015-20)
Section C
Semester II
Roll No.: 173/15
Paper: Economics

Signature

Submitted
Submitted
To:on:
Dr.__/__/2016
Gulshan
ACKNOWLEDGEMENT
Any work requires the effort of many people and this is no different. First of all, I
would like to express my heartiest thanks to the Director of University Institute of
Legal Studies, Dr. Sangita Bhalla for giving me an opportunity to study in such a
great institution. Then I thank my teacher Dr. Gulshan for firstly making me
understand the contents of my topic and then giving me a wonderful opportunity
to present this topic in form of an assignment. His support and teaching helped me
a lot to complete this assignment.

I would also like to thank my friends who were always available to me for help
and also helped me collect data for my project through various sources. They also
provided me with material I needed and made my work as easy as possible.

Regardless of anything, I wish to express my gratitude to those who may have contributed to
this assignment, even though anonymously.
TABLE OF CONTENTS
ACKNOWLEDGEMENT_____________________________________________________1
TABLE OF CONTENTS______________________________________________________2
INTRODUCTION____________________________________________________________3
MAIN ELEMENTS OF NATIONAL INCOME____________________________________4
Monetary Expression______________________________________________________________4
Final Goods and Services___________________________________________________________4
Flow____________________________________________________________________________5
Current Output___________________________________________________________________5
MEASUREMENT OF NATIONAL INCOME_____________________________________6
EXPENDITURE METHOD____________________________________________________8
Step 1: Classification of Sectors______________________________________________________8
Step 2: Classification of Expenditure__________________________________________________8
Step 3: Measurement of Expenditure__________________________________________________8
Estimation of Private Final Consumption Expenditure:____________________________8
Estimation of Investment Expenditure:________________________________________9
Estimation of Government Final Consumption Expenditure:______________________10
Estimation of Net Exports:_________________________________________________11
Step 4: Estimation of Net Domestic Product at Factor Cost________________________________12
Step 5: Estimation of Net Factor Income Earned from Abroad_____________________________13
PRECAUTIONS IN THE ESTIMATION OF NATIONAL INCOME BY EXPENDITURE
METHOD_________________________________________________________________14
DIFFICULTIES IN ESTIMATION OF NATIONAL INCOME BY EXPENDITURE
METHOD_________________________________________________________________15
ILLUSTRATIONS__________________________________________________________16
CONCLUSION_____________________________________________________________18
REFERENCES_____________________________________________________________19
BIBLIOGRAPHY___________________________________________________________20
WEBLIOGRAPHY__________________________________________________________20
INTRODUCTION
National income is the total value a countrys final output of all new goods and services
produced in one year. Understanding how national income is created is the starting point for
macroeconomics.

The simplest way to think about national income is to consider what happens when one
product is manufactured and sold. Typically, goods are produced in a number of 'stages',
where raw materials are converted by firms at one stage, then sold to firms at the next stage.
Value is added at each, intermediate, stage, and, at the final stage, the product is given a retail
selling price. The retail price reflects the value added in terms of all the resources used in all
the previous stages of production.

In accounting terms, only the value of final output is recorded. To avoid the problem of
double counting, only the value of the final stage, the retail price, is included, and not the
value added in all the intermediate stages - the costs of production, plus profits. In short,
national income is the value of all the final output of goods and services produced in one
year.

National income is defined as the value of all goods and services produced by the normal
residents of a country, whether operating within the domestic territory of the country or
outside, in a year. National income is, thus, a monetary expression of the current
achievements of the people of a country expressed through their production activities.

According to Dornbusch and Fischer


national income is the value of final goods and services produced by domestically owned
factors of production within a given period.1

National income measures the monetary value of the flow of output of goods and services
produced in an economy over a period of time. Measuring the level and rate of growth of
national income (Y) is important for seeing:

The rate of economic growth


Changes to average living standards
Changes to the distribution of income

The concept of national income has been discussed in detail in this assignment.
MAIN ELEMENTS OF NATIONAL INCOME
Following are the main elements of National Income:

Elements of
National
Income

Monetary Final Goods and


Flow Current Output
Expression Services

Monetary Expression
In the first place, national income is expressed in monetary terms. It adds together the value
of all final goods and services produced in a country during a year. Since a vast number of
diverse goods and services are produced in the economy, it is necessary when adding them to
use some kind of common denominator. We cannot add together unlike items, such as apples
and oranges, or hairpins and aeroplanes, or services of barbers and doctors since they are
expressed in different units like kilograms and metres. Thus, in order to aggregate all goods
and services, it is essential to express them in money terms, such as rupee, dollar, etc., which
is a common denominator. We can assign monetary value in terms of market prices or in
terms of factor costs. National income is expressed both at market prices and at factor costs.

Final Goods and Services


National income reflects the value of final goods and services. Final products are those
goods and services which are sold to the final users during the year. These goods and services
are purchased for final consumption by consumers and for investment by producers, and not
for resale. All consumer goods and services like food items, refrigerators we buy for the
consumption of our family are final goods. Purchases of capital goods like machines,
buildings are also final goods. Producers buy these capital goods for their own use (as
investment) and not for resale. Thus, final goods are meant for final use by consumers and
producers. They are finished goods for final consumption and investment. Intermediate
products are those goods and services which are used by the producers as inputs into a further
stage of production. These goods move from one stage of production to another in the
production of a final product. These are the products which are purchased by producers from
other producers and are resold after converting them into final goods.
For example, seeds, fertilizers, etc. purchased by farmers are intermediate products. Farmers
grow wheat, rice and other crops by using these intermediate products. When the farmers sell
wheat, rice, etc., they recover the cost incurred on these intermediate products. It tantamount
to selling of these intermediate products.

To measure national income accurately, all goods and services produced during a year must
be counted once, but not more than once. Most products go through a series of production
stages before reaching the market. As a result, components of most products are bought and
sold many times. For example, flour mills sell flour to bakeries, and bakeries use this flour in
making breads which are sold to households. How should we treat such intermediate products
in computing national income? The answer is that national income includes only the value of
final goods and services. Intermediate products are excluded from national income because
their value is already included in the value of final products in which they are used. For
instance, since flour is used in making bread, the total value of bread includes the value of
flour also. If we add the value of flour to the value of bread, the value of flour would be
included twice. To add the intermediate goods to the final goods would be double counting
that is, the flour would be counted more than once. National income includes the value of
bread and not of flour used in making bread. Hence, national income is the total value of final
goods and services produced.

Flow
National income is a flow concept. It is the flow of goods and services. A flow is a quantity
which is measured over a period of time. National income is a very important flow variable in
economics. It tells us how many rupees worth of goods and services are flowing in the
economy per unit of time. Conventionally, national income is expressed over one year. It is in
this sense we say that national income of India in 2007-08 was 37,87,596 crores.

Current Output
National income measures the value of currently produced goods and services. It excludes
'pure exchange transactions', such as sale and purchase of second- hand goods or used goods,
purchase and sale of securities and transfer payments. These transactions are excluded from
national income because nothing new is produced in the current year. The reason for
excluding second-hand sales, i.e. sale of used goods, from national income is fairly obvious.
Such sales dont reflect any current production whereas national income relates to current
production only.
MEASUREMENT OF NATIONAL INCOME
National income is often considered as the most comprehensive measure of how well the
economy is performing. It is necessary and important, therefore, to measure national income
of a country so as to have an idea of the performance of the economy. Measuring national
income is extremely complicated and gigantic task. However, economists have devised
various ways of estimating national income. In fact, national income estimates are made in
every country these days. In India, the task of estimating national income is entrusted with
the Central Statistical Organisation (CSO), a department of Ministry of Planning and
Programme Implementation. In this assignment we examine how economists measure a
country's national income that is generated from production. While measuring national
income it is important to keep in mind that national income is taken in the sense of 'net
national product at factor cost' (NNPFC). However, while estimating NNPFC, we would first be
required to estimate the gross domestic product (GDP).

As we know, in the production process in an economy goods and services are produced by
the combination of factors of production. Goods and services produced are distributed as
factor incomes to the owners of factors of production. The incomes earned or generated are
spent on the consumer goods and capital goods. Thus, production gives rise to income,
income gives rise to expenditure and expenditure gives rise income again. Put in terms of
circular flow of income, we can distinguish three successive stages or phases in the circular
flow:

production of goods and services by producers with the use of productive resources
distribution of incomes to the owners of productive resources, and
expenditure of incomes on the purchase of final consumer and capital

These three phases have been shown below:

Income

Expenditu
Production
re

Corresponding to these three phases of circular flow of income- production, income and
expenditure national income of a country be viewed in three ways: as a flow of goods and
services produced, as a flow of on goods and services produced, as a flow of income
generated and as a flow of expenditure on goods and services. Accordingly, there are three
different ways or methods of measuring national income:

Net Product Method or Value Added Method


Income Method
Expenditure Method

These three different ways of measuring national income are three different points at which
the flow of income round the whole circuit of circular flow of income is measured. All the
three methods give the same measure of national income but they refer to conceptually
different activities in the economy and provide different ways to look at national income.
Therefore, each method is important in its own way.

The expenditure method of measuring national income is now explained.


EXPENDITURE METHOD
The Expenditure Method measures national income at the disposition stage, i.e. the
disposition of final products. It estimates national income by measuring the final expenditure
on gross domestic product. In other words, it measures national income by estimating
expenditure on final products at market prices during a year. The final products are those
which are purchased for consumption and investment. As such, expenditure on consumption
and investment constitutes the value of the final products. Consumption expenditure is
incurred by private individuals like households and government. Accordingly, consumption
expenditure is classified into private and government final consumption expenditure.
Expenditure on investment is done by producers and government within the economy. In an
open economy, there is foreign component of expenditure in the form of net exports.

Having understood the basic framework of expenditure, let us explain the expenditure
method. Estimation of national income by expenditure method involves the following steps:

Step 1: Classification of Sectors


All the economic units which incur expenditure on final products are divided into four
groups:

Households,
Business sector,
Government sector,
Rest-of-the-world sector.

Step 2: Classification of Expenditure


Final expenditure on final goods and services in the economy is divided into four broad
categories:

Private final consumption expenditure,


Investment expenditure,
Government final consumption expenditure,
Net exports.

These four categories of expenditure correspond closely to the four sectors into which the
economy is divided as explained in step 1 above.

Step 3: Measurement of Expenditure


The third step involves the measurement of the components of final expenditure. Different
components of final expenditure are measured as follows:

Estimation of Private Final Consumption Expenditure: Private final consumption


expenditure comprises expenditure on the purchase of consumer goods and services (except
houses) by households and private non-profit institutions serving households like schools,
clubs, charitable hospitals, etc. It is divided into three major sub-categories:
1. Expenditure on non-durable goods, such as food, beverages, etc. which are used
immediately or within a short span of time.
2. Expenditure on durable goods like TVs, cars, etc. which could be used for a longer
period of time.
3. Expenditure on services like transport services, medical services, etc.

We calculate the final consumption expenditure by the households and private non-profit
institutions serving the households on domestically produced consumer goods and services
by multiplying the volume of sale of these goods and services in the market with their retail
prices. While calculating consumption expenditure, several points should be noted.

First, expenditure on purchase of new houses is excluded from consumption


expenditure since it is taken as investment expenditure.
Second, only currently produced goods and services are included. Expenditure on
purchase of old goods like old cars should be excluded because these goods do not
represent current output.
Third, production for self- consumption by producers should be included.
Lastly, imputed rent on the self-houses is also included -occupied in the final
consumption expenditure. By living in their own houses, the owners are consuming or
using the housing services.

Estimation of Investment Expenditure: Investment means addition to the physical stock of


capital goods such as machinery factories, residential houses and addition to a firm's
inventories of goods during a given period. Investment expenditure is the expenditure on
investment or capital goods. Capital goods are produced by firms and they may be bought by
firms by households (purchase of residential houses) or by governments.

Investment expenditure is divided into three sub-categories:

1. Gross fixed business investment, or gross fixed, business capital formation, i.e.
expenditure on the purchase of new plants, machinery, equipment, factories, transport
equipment, construction works (like irrigation, dams, telephone lines, etc.) and
breeding stock is the first category of investment expenditure. It is estimated by taking
the value of final sale of capital goods at market value. Own-account production of
machinery and equipment should be added to get the final expenditure on machinery
and equipment.
2. Inventory investment, i.e. change in inventories of the firms which are in the
warehouses, goods on store shelves, on showroom floors, semi-finished goods, raw
material with producers, etc. is the second category of investment expenditure.
Inventories are calculated at market prices. Net increase in stock of consumer goods
with households is excluded from inventory investment on the assumption that goods
with the consumers are consumed the moment they are purchased. We include
inventory investment as an investment item because it represents goods produced but
not used for current consumption. Inventory investment in an economy is calculated
by taking the difference between the opening stock and the closing stock.
3. Expenditure on residential investment, i.e. expenditure on the purchase of new houses
by households and landlords is the third category of investment. Expenditure on
residential houses can be found out by estimating the total money spent on
construction of new houses. Total expenditure on new housing is equal to the
expenditure on the material inputs like cement, steel, bricks, wood, etc. and factor
payments to labour and capital in the form of wages, salaries, rent, interest and profits.
Own-account production of houses, expenditure on major repairs and renovations are
to be included in the expenditure on residential houses. Thus, expenditure on
machinery and equipment/ changes in inventories and expenditure on residential
housing give us gross capital formation or gross investment expenditure.

Thus:

Gross Domestic Investment = Gross Fixed Business Investment + Inventory investment +


Gross residential investment

Estimation of Government Final Consumption Expenditure: The third category of spending


is government expenditure. The government expenditures are of two types:

1. Current expenditure on goods and services, i.e. government final consumption


expenditure.
2. Capital expenditure, i.e. public investment.

Capital expenditure of the government is generally taken along with private investment
expenditure. Therefore, take here general government final expenditure. The final
expenditure of the general government is also known as government final consumption
expenditure. It consists of expenditure on administration, defence expenditure, expenditure
on maintenance of 'law and order, expenditure on social welfare services, education,
sanitation, etc. The government incurs expenditure in providing these services to the public to
satisfy their collective wants. That is why this expenditure is regarded as government final
consumption expenditure. Very often government expenditure does not produce marketable
services. These government services have no market price, Therefore, there arises the
problem of how to value the government services. Government final consumption
expenditure is valued in terms of cost to government since government sacrifices have no
market price. The cost of these services to the government is the sum total of compensation of
employees and the cost of the goods and services purchased by the government to provide
these services. For example, cost of defence services comprises wages and salaries paid to
military personnel and cost of military equipment.

Though the government does not sell these services in the market, yet sometimes it charges a
very nominal amount as fees from those individuals who get these services. For instance,
government hospitals take nominal charges from the patients and government educational
institutions charge nominal fees from the students. Such receipts by the government should
be deducted from the total cost of these services to arrive at the net expenditure on these
services. It is important to note that a large part of the government expenditure is of the
nature of transfer payments like social security schemes, unemployment compensation and
welfare payments. These transfer payments redistribute existing income and are not made for
goods and services produced in the current period. They are, therefore, excluded from
national income as they do not generate any output in the current period.

Estimation of Net Exports: The final spending item is net exports. Net exports are the
difference between the value of goods and services exported to other countries and the value
of goods and services imported from other countries. In an open economy, a country has
transactions with rest of the world through, among other things, international trade, i.e.
exports and imports of goods and services. A country exports some of its goods to other
countries. For example, India exports tea, coffee, jute and cotton fabrics, cars and bicycles to
other countries. A country also exports various types of services, such as shipping, insurance,
banking, transport and tourist services. For instance, when foreigners use Indian ships to
transport goods and passengers, India exports shipping services. There is also exports of
goods and services in the form of direct purchases made in the domestic market by non-
resident households and others. For example, when tourists come to India from abroad, they
make direct purchases in India in the form of purchases of handicrafts, expenditure on
transport and various types of goods and services. The same amounts to countrys exports to
other countries.

Why are net exports added when computing national income by expenditure approach? There
are two reasons.

First, the exports represent foreign spending on domestic goods. When foreigners
purchase goods and services we produce, their spending adds to the demand for
domestically produced goods and services. Goods and services exported to other
countries are produced by producers operating within the domestic territory of a
country. Exports of goods and services is a part of domestic product. Thus, exports
need to be added to get a measure of production.
The second reason is that expenditure on imports of goods and services is part of the
aggregate spending by the residents of a country, though it is a part of the domestic
product of other countries. For example, if an Indian household imports a Toyota car
from Japan, it is included in his consumption expenditure even though it is not
produced in India. To measure what is produced in 'India, the expenditure on Toyota
car must be deducted. Imports must be subtracted to find out what is total production
in the economy. Thus, net exports account for domestic spending on foreign goods
and foreign spending on domestic goods. Since net exports are exports minus imports,
adding net exports to spending is the same as adding exports and subtracting all
imports.

By adding the above mentioned four types of expenditure, we get GDP at market
price(GDPMP). This is indicated in the flow chart:
PRIVATE FINAL CONSUMTION
EXPENDITURE GROSS FIXED BUINESS
INVESTMENT
(C)

GROSS INVESTMENT
EXPENDITURE ( INCLUDING
GOVERNMENT INVESTMENT
EXPENDITURE OR PUBLIC INVENTORY INVESTMENT
INVESTMENT)
(I)
GDPMP AS SUM OF
EXPENDITURE

GOVERNMENT FINAL
CONSUMPTION EXPENDITURE RESIDENTIAL INVESTMENT
(G)

NET EXPORTS (EXPORTS-


IMPORTS)
(X-M)

Step 4: Estimation of Net Domestic Product at Factor


Cost
The sum total of four items consumption, investment (net), government spending and net
exports is the total final expenditure which gives us Gross Domestic Product at market
price(GDPMP). However, a part of this expenditure is incurred to replace the worn out capital.
The amount necessary for replacement is called depreciation. Therefore, by deducting
depreciation from GDP we get Net Domestic Product at market price. By deducting net
indirect taxes, we get Net Domestic Product at factor cost(NDPFC).

Depreciation: Every corporation makes allowance for expenditure on wearing out and
depreciation of machines, plants and other capital equipment. Since this sum also is not a part
of the income received by the factors of production, it is, therefore, also included in the GNP.
On the measure of final output, that part of our final output that comprises of capital goods
constitutes gross investment of an economy. These may be machines, tools and implements;
buildings, office spaces, storehouses or infrastructure like roads, bridges, airports or jetties.
But all the capital goods produced in a year do not constitute an addition to the capital stock
already existing. A significant part of current output of capital goods goes in maintaining or
replacing part of the existing stock of capital goods. This is because the already existing
capital stock suffers wear and tear and needs maintenance and replacement. A part of the
capital goods produced this year goes for replacement of existing capital goods and is not an
addition to the stock of capital goods already existing and its value needs to be subtracted
from gross investment for arriving at the measure for net investment. This deletion, which is
made from the value of gross investment in order to accommodate regular wear and tear of
capital, is called depreciation.2

Net Indirect Taxes: The government levies a number of indirect taxes, like excise duties and
sales tax. These taxes are included in the price of commodities. But revenue from these goes
to the government treasury and not to the factors of production. Therefore, the income due to
such taxes is added to the GNP. It is to be noted that all these variables are evaluated at
market prices. Market price includes indirect taxes. When indirect taxes are imposed on
goods and services, their prices go up. Indirect taxes accrue to the government. We have to
deduct them from NNP evaluated at market prices in order to calculate that part of NNP
which actually accrues to the factors of production. Similarly, there may be subsidies granted
by the government on the prices of some commodities (in India petrol is heavily taxed by the
government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP
evaluated at market prices. The measure that we obtain by doing so is called Net National
Product at factor cost or National Income.3

Step 5: Estimation of Net Factor Income Earned from


Abroad
In the last stage, net factor income earned from abroad is added to net domestic product at
factor cost to arrive at Net National Product at factor cost or National Income. This is the
difference between the value of exports of goods and services and the value of imports of
goods and services. If this difference is positive, it is added to the GNP and if it is negative, it
is deducted from the GNP.

Net factor income from abroad = Factor income earned by the domestic factors of production
employed in the rest of the world Factor income earned by the factors of production of the
rest of the world employed in the domestic economy4

Thus:

Y= C + I + G + (X -M) Depreciation Net Indirect Taxes + NFIA

Where:
Y represents national income,
C stands for private final consumption expenditure,
I represents net domestic investment expenditure
G stands for government final consumption expenditure,
(X - M) represents net exports,
NIT stands for net indirect taxes,
NFIA represents net factor income from abroad.
PRECAUTIONS IN THE ESTIMATION OF NATIONAL
INCOME BY EXPENDITURE METHOD
While estimating national income by expenditure method, we need to take the following
precautions:

All final products should be included irrespective of whether expenditure is incurred


on them or not. Many final products are not purchased from the markets and hence no
expenditure is incurred on them, but these must be included in the national income.
Goods meant for self-consumption, such as farmers consuming part of the food grains
produced by them, must be assigned some value based on market prices of the similar
products because these goods are the part of the production in an economy. Similarly,
imputed value to the owner-occupied houses must be assigned because the owners of
these houses are consuming the housing services by living in their own houses. In the
same way, own-account production of machinery and equipment should be added to
get the final expenditure on machinery and equipment.
Expenditure on intermediate products is excluded. The reason is that the value of
intermediate goods is already included as part of the market price of final goods in
which they are used. To add the expenditure on intermediate goods to the expenditure
incurred on the final goods would be double-counting.
All expenditures on second-hand goods should be excluded. National income
measures the value of goods produced in the current year. Expenditure on second-
hand goods reflects only transfer in the ownership of these goods; it does not lead to
any addition to the economy's output.
Expenditure on financial assets like shares and bonds is excluded because it reflects
only transfer in the ownership of these assets.
Government expenditure on transfer payments is not included in expenditure and,
therefore, national income. Transfer payments are payments which are made without
any factor services rendered in return in the current period. Although these payments
play an important part in achieving certain social objectives, they do not create current
production. Transfer payments are not, therefore, a part of expenditure on final output.
DIFFICULTIES IN ESTIMATION OF NATIONAL
INCOME BY EXPENDITURE METHOD
Expenditure method involves the following difficulties:

Unsold amount of goods adds to inventories. Increase in inventories of goods is


included in national income because these goods reflect current production of goods
and services. However, there is the problem of valuation of inventories in view of the
changes in their prices.
Estimation of depreciation also poses problem whether it is to be valued at historical
cost basis i.e. the cost price when capital goods were purchased) or replacement cost
basis.
National income accountants are not very clear about whether certain products like
education, transport expenses etc. are final products or intermediate products.
In many cases, it is not possible to draw a clear cut line of demarcation between
intermediate goods and the final goods. Whether a product is a final product or an
intermediate product depends on its use. For instance, flour is a final product for a
household but an intermediate product for a baker.
Lack of adequate and reliable data, particularly in the case of subsistence and
unincorporated sectors, is a serious problem in the estimation of national income in
underdeveloped economies.
Inventory valuation is a very difficult and cumbersome job. The problem of inventory
valuation is how to take the valuation of stock of goods, whether the valuation of
stock be done at the original cost or at current prices. The practice, however, is to
carry out valuation at current prices.
This method is difficult to apply in developing countries like India due to non-
availability of adequate data regarding expenditure.

The expenditure method provides information about the level of consumption and investment
in the economy. It also shows the relative share of private and public sector in the overall
expenditure of an economy.
ILLUSTRATIONS
Sr. No. Contents (in crores)
i. Gross Value added at Market Price by the Primary Sector 300
ii. Private Final Consumption Expenditure 750
iii. Consumption of Fixed Capital 150
iv. Net Indirect Taxes 120
v. Gross Value Added at Market Price by the Secondary Sector 200
vi. Net Domestic Fixed Capital Formation 220
vii. Changes in Stocks (-)20
viii. Gross Value added by tertiary sector 700
ix. Net Imports 50
x. Government Final Consumption Expenditure 150
xi. Net Factor Income from Abroad 20
Solution:

National Income (NNPFC)= Private Final Consumption Expenditure + Government Final


Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stocks
Net Imports Net Indirect Taxes + Net Factor Income from Abroad
=750 +150 + 220 + (-20) -50 -120 + 20= 950 crore
Sr. No. Contents (in Crores)
1. Value of Output in Economic Territory 4100
2. Net Imports (-)50
3. Intermediate Purchase by Primary Sector 600
4. Private Final Consumption expenditure 1450
5. Intermediate Purchases by Secondary Sector 700
6. Govt. Final Consumption expenditure 400
7. Net Domestic Fixed Capital Formation 200
8. Intermediate Purchase by Tertiary Sector 700
9. Net Changes in Stock (-)50
10. Indirect Taxes 100
11. Consumption of Fixed Capital 50
Net Domestic Product at Factor Cost(NDPFC)= Private Final Consumption Expenditure+
Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Net
Change in Stocks Net Imports Indirect Taxes
=1450 + 400 + [200 +(-50)] -(-50)-100= 1950 crore
CONCLUSION
National income is defined as the value of all goods and services produced by the normal
residents of a country, whether operating within the domestic territory of the country or
outside, in a year. National income is, thus, a monetary expression of the current
achievements of the people of a country expressed through their production activities.

In the production process in an economy goods and services are produced by the combination
of factors of production. Goods and services produced are distributed as factor incomes to the
owners of factors of production. The incomes earned or generated are spent on the consumer
goods and capital goods. Thus, production gives rise to income, income gives rise to
expenditure and expenditure gives rise income again.

The Expenditure Method measures national income at the disposition stage, i.e. the
disposition of final products. It estimates national income by measuring the final expenditure
on gross domestic product. In other words, it measures national income by estimating
expenditure on final products at market prices during a year.

Estimation of national income by expenditure method involves Classification of Sectors >


Classification of Expenditure > Measurement of Expenditure (Private Final Consumption
Expenditure, Investment Expenditure, Government Final Consumption Expenditure, Net
Exports) > Estimation of Net Domestic Product at Factor Cost > Estimation of Net Factor
Income Earned from Abroad.

In estimation of National Income by expenditure Method, some Precautions need to be taken


like inclusion of final products, exclusion of expenditure on intermediate products and
expenditures on second-hand goods should be excluded.

There are several difficulties in Estimation of National Income using Expenditure Method the
biggest of them being non availability of the reliable data.
REFERENCES
1
Introductory Macroeconomics by Radha Bahuguna
2
http://www.tutor2u.net/economics/reference/measuring-national-income
3
https://courses.byui.edu/econ_151/presentations/Lesson_03.htm
4
http://www.yourarticlelibrary.com/notes/national-income-definition-concepts-and-methods-
of-measuring-national-income/30801/
BIBLIOGRAPHY
M.L. Jhingan (Latest Ed.): Macro Economic Theory, Varinda Publishers, Delhi, 2014
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