Methods of Measuring National Income

i. Expenditure Approach

It looks at the demand for output and speaks of the components of the aggregate demand and services. In an open economy, total demand for goods and services is made up of 4 components:

a. Consumption Expenditure (C)

b. Investment Expenditure.

c. Government Expenditure

d. Net Exports/ Foreign Demands

According to this approach, the GDP can be computed as:

Y=C+I+G+(X-M)

a. Consumption Expenditure

It includes purchase of final goods and services by consumers/ individuals. The purchase includes purchase of durable goods like stereos, television, computers, etc, semi/non-durable goods like foodstuff, clothing, petrol, service like medical care, bus ride.

b. Gross Private Investment

 It means addition to or replacement of physical stock of production of capital. It consists of fixed, inventory and residential investment.

i. Fixed Investment: It includes purchase of new factories, tools and machines.

ii. Inventory Investment: It includes goods that business put aside in storage.

iii. Residential Investment: It includes the new housing of the people buy to live in.

c. Government Purchases

It includes spending on the wages of civil servants and soldiers, purchase of computers, tanks, military craft and investment programmes in roads and hospitals.

d. Net Exports

It is the difference between the value of exports and value of imports. The export includes expenditure made by foreigners on goods and services of a country exported to other countries. The import includes the expenditure made by household, firm and government of a country on imported goods and services.

ii. Income Approach

It measures the GDP from a flow-cost- approach. It measures GDP by adding together all the incomes received by suppliers of factors of production over a fixed period of time normally in one year. Under this method, income comprises of:

1. Rental Income

It includes all rents received by household for lease of land and other property.

2. Labor income

It includes wages and salaries, commissions, payments in kinds, incentive payments, tips and benefit.

3. Income from Self-Employment

It covers income of those people who are earning a living by selling their services or output but are not employed.

4. Proprietor's income

It includes rental income, labor income and income earned from interest and profits.

5. Interest Payments

It is the payment made to the owner of capital.

6.  Corporate Profits

It is the net income of the business after all other costs such as rent, wage and interest have been deducted from the total income.

7. Indirect Business Tax

It includes sales tax, VAT, excise duty and property tax.

8. Capital Consumption or Depreciation

It refers to the reduction in the value of assets generally from the wear and tear of the machine.

9. Net Income from Abroad

It is the difference between income earned by the domestic factors of production in foreign territories and foreign factors of production in the home country.

iii. Production Approach

It is also known as inventory or output approach. It is done through 2 methods:

a. Final Product Approach

In this method, national income is computed by adding together the market value of all final goods and services produced by the different industries in a country within the given year.

b. Value Added Approach

It estimates national income by considering the values of both intermediate and final output simultaneously. It simply measures how much each firm adds to the value of an intermediate goods as it moves through the chain of production.