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Saturday, 23 June 2018

How to measure national income by expenditure method

National income is calculated by

  1. Product method or value added method
  2. Factor income method
  3. Expenditure method
 To calculate national income, first of all we shall calculate domestic income by following formula:

Private final consumption expenditure + investment expenditure+ government consumption expenditure + (export- import)

= Gross Domestic Income

Add the following to gross domestic income calculated above:

  1. Net factor income from abroad ( deduct if result is Net factor income to abroad).
Now you will get Gross National income at Market price.

Now, to arrive at net from gross, deduct depreciation from Gross national income. The result will be Net national income at Market price.

Finally, to arrive at National income at factor cost, deduct net indirect tax from the above result. Net indirect tax is recieved after deduction of subsidies from indirect taxes. If net indirect tax is positive then deduct otherwise add.

So, in brief use this complete formula to arrive on Net National Income at Factor cost:

C+I+G+(X-M)+Net factor income from abroad- depreciation- net indirect tax

C means private consumption expenditure, I means investment expenditure and G means government consumption expenditure. Investment expenditure is classified into following categories:

  1. Business investment
  2. Government investment
  3. Household investment 
Investment in stock is calculated as follows:

Closing stock - opening stock.

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