Saturday, April 18, 2009

Measurement of National Income - Expenditure Approach

Expenditure Approach:

According to this method the money value of all expenditure on final product will add up to GNP from which capital consumption and net indirect tax (indirect tax-subsidy) are deducted.

NI = GNP - Capital Consumption - Indirect Tax + Subsidy
where,
GNP = C + I + G + NX
Net Income form abroad=0

We now explain four categories of expenditure:

(1) Consumption Expenditure (C):
It includes expenditure by household (a) durable goods such as, automobile, refrigerators etc, (b) non-durable goods such as: food, shirts etc and (c) services such as doctors, education etc.

(2) Gross Investment:
It includes (a) all final purchase of machinery, equipment, and tools by business enterprise in given time period-change in capital stock (b) all current construction (c) changes in inventories: changes in stocks of finished goods and goods in process as well as changes in the raw material that businesses keep on hand. Inventories can be negative, positive or zero

(3) Government Expenditure (G):
This includes all governmental spending (federal, state and local) on the finished product of business and all direct purchases of resources such as labour etc, it excludes all govt. transfer payments, because it doesn't reflect any current production.

(4) Net Exports (NX) = Export - Import :
This includes the difference between the imports and exports, called net exports. it is the component of the total demand for our goods. it can be negative positive or zero.

5 comments:

  1. The measurement of national income is not well understood but that of expenditures are well cleared. please can u throw more light on it.

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  2. i was searching for the concept of expenditure method of computing national income ...well now my concept is well clear by this .....thanks for sharing such a comprehensive concept

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  3. hello, can yu explain why exports are added and imports subtracted in Expenditure approach?

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  4. Could you please assist me with the strengths and weaknesses of each of the three approaches to national income? Thanks.

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  5. Hey! Please i need to know how do we treat statistical discrepancy

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