METHODS OF MEASURING NATIONAL

INCOME

1. INCOME METHOD

2.EXPENDITURE METHOD

3. VALUE- ADDED
(PRODUCT METHOD)
 EXPENDITURE METHOD
This method measures national income as sum
total of final expenditures incurred by
household, business firms, govt. and
foreigners.
Also known as ‘INCOME DISPOSAL METHOD’
COMPONENTS OF FINAL EXPENDITURES

• Private final consumption expenditure (C)

• Govt. final consumption expenditure (G)
• Gross domestic capital formation (investment
expenditure) (I)
• Net exports. (X-M)

Note:- Investment expenditure may be

either in GROSS or in NET terms
1.Private final consumption expenditure (C)

Expenditures on final goods and services by the

individual households and non-profit private
institutions .
Expenditure on durable, semi-durable, non-durable
goods and services.
 2.Govt. final consumption expenditure (G)

• Refers to the expenditure incurred by general

govt. on various administrative services like
defense, law and order, education , health etc.
 3.Gross Investment expenditure (I) (Gross domestic
capital formation)

Expenditure on the purchase of final goods by the

producers.
These goods are to be further used in the process of
production. It is further classified as:-
a) Gross domestic fixed investment expenditure.
(Gross business FIXED investment, Gross Residential
construction investment, Gross public investment)
b) Inventory investment (change in stock),
Closing stock – Opening stock (C-O)
= Gross fixed investment expenditure + change in stock
4. NET EXPORT (X-M)
 Difference between exports and imports
during an accounting year.
 Export(X) refers to the expenditure by

foreigners on purchase of domestic products.

 Imports(M) refers to the expenditure by

residents on foreign products.

NET EXPORT = EXPORT – IMPORT
Note:- Net Export is NOT the value of NFYA
NOTE THE FOLLOWING POINTS:-
1.When we add up all the final expenditures together such as C, G, I
& (X-M) together we will get the value of GDP(MP), If the value of :
‘I’ is given in GROSS term.

2. When we add up all the final expenditures together such as C, G, I

& (X-M) together we will get the value of NDP(MP), If the value of
I is given in NET term.

3. Under this method we ALWAYS get the MARKET PRICE (MP)

value. Such as GDP(MP) , NDP(MP) etc.

4. GROSS & NET depends on the INVESTMENT (I) expenditure

STEPS OF EXPENDITURE METHOD for
measuring NATIONAL INCOME.
The various steps involved in estimating NATIONAL
by expenditure method are:-
1. Identifying the producing units into PRIMARY ,
SECONDARY and TERTIARY SECTOR.
2.Estimate the FINAL EXPENDITURES by each sector
in the form of C, G, I & (X-M). Obtain GDP(MP), when
‘I’ is in GROSS.
3.Calculate the DOMESTIC INCOME (NDP(FC) ) by
subtracting the values of DEPRECIATION and NIT from GDP(MP)
4. Estimate the value of NFYA and ADD along with the value of
NDP(FC) to get the value of NATIONAL INCOME.
 EXPENDITURE METHOD

Private final consumption expenditure (C)

+
Govt. final consumption expenditure (G)
+
= Gross domestic capital formation (investment expenditure) (I)
+
Net exports. (X-M)

= GDP(MP)

(-)DEPRECIATION, (-) NIT

= NDP(FC)

(+ ) NFYA
= NATIONAL INCOME
NNP (FC)
PRECAUTIONS OF EXPENDITURE METHOD
Items which are NOT including:-
1. Expenditure on intermediate goods
2. Purchase of second hand goods.
3. Purchase of financial assets like shares, debentures, bonds etc.
4. Transfer payments.

(SUCH RECEIPTS ARE NOT CONSIDERED ANY PRODUCTION ACTIVITY

AND THERE IS NO VALUE ADDITIONS)
Items which are including:-

1. commission, brokerage on sale of second hand goods, shares etc.

2.Imputed values, production for self consumption, interest on own capital.
3. Free services from general govt. and Pvt.non –profit institutions serving
households.
(THESE ARE PRODUCTIVE ACTIVITIES AND ADD TO THE CURRENT
FLOW OF GOODS AND SERVICES.)