National Income Accounting Test - 2

The method used to calculate the income by adding all the expenditures on the purchase of final goods and services produced during an accounting year is called expenditure method

Expenditure method: national income is measured as a flow of expenditure. Includes sum total of private consumption expenditure. Government consumption expenditure, gross capital formation (Government and private) and net exports (Export-Import).

National income can be calculated by three methods:

• Product method: In this method, national income is measured as a flow of goods and services.
  
• Income method: In this method, national income is measured as a flow of factor incomes. There are generally four factors of production labour, capital, land and entrepreneurship. 
  
• Expenditure method: In this method, national income is measured as a flow of expenditure.
  

National Income is the total amount of goods and services produced within the nation during the given period say, 1 year. It is the total of factor income i.e. wages, interest, rent, profit, received by factors of production i.e. labor, capital, land, and entrepreneurship of a nation.

Average income = Total Income/ Total number of persons 
                             = (4000+5000+6000+7000)/4

                              = 5500

National income is measured as an aggregate value of all final goods and services produced by all the firms it is called product method.

Product method: in this method national income is measured as money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process.

Expenditure method is also called as income disposal method

Expenditure method: National income is measured as a flow of expenditure. Includes sum total of private consumption expenditure. Government consumption expenditure, gross capital formation (Government and private) and net exports (Export-Import).

Three methods of calculating national income are product method, income method and expenditure method

• Product method: In this method, national income is measured as money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process.
  
• Income method: According to this method income is measured as a flow of factors income. There are generally four factors of production labour, capital, land and entrepreneurship. Labour gets wages and salaries, capital gets interest, land gets rent and entrepreneur gets profit as their remuneration.
  
• Expenditure method: National income is measured as a flow of expenditure. t includes the sum total of private consumption expenditure, government consumption expenditure, gross capital formation (Government and private) and net exports (export-import).