National Income — Economics STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceEconomicsNational Income5 Marks
Question
Describe the expenditure method for measuring national income.
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Answer
Introduction :
Prof. Fisher has explained the concept of National Income on the basis of flow of expenditure.
According to him, " In any country, the total of final monetary value of final goods and services used by consumers during a year can be called national income.
The purpose of income earned by a factors of production is consumption.
Therefore, the total expenditure indicates the national income.
Producers spend money for production. Consumers spend money for consumption.
The Government also spends money.
Thus, addition of all these expenditure can help in calculation of national income.
Expenditure Method for Measuring National Income:
This method of measuring national income is developed by Prof. Fisher.
In this method national income is measured by summing up the total monetary expenditure incurred on goods and services by individuals, families, firms and government during a year.
This method is based on the assumption that income = expenditure.
Because the ultimate goal of income earned is to incurred expenditure.
During a financial year total expenditure Is equal to the $GDP.$
From the point of view of expenditure, national income is equivalents to consumption cost and investment.
To know the national income from this method, the expenditure made by families.
Government and productive units are added. In this method,
consumption expenditure $C.,$
Investment expenditure $(I),$
Government $(G),$
and Expenditure made by foreign citizens on our exports $(M)$
are taken into consideration for the calculation of national income.
The equation of measuring national income is as follow :
$Y = C + G + I + (X - M) + (R - I')$
Here, $Y =$ National Income
$C =$ Private consumption expenditure
$G =$ Government Expenditure
$I =$ Domestic Investment Expenditure
$(X-M) =$ Net Exports
$(R-P) =$ Income from foreign countries - Payments to foreign countries.
Methods (Important Factors) :
The following monetary factors are considered while counting national income.
Consumption Expenditure :
In this method expenditure incurred on consumable goods I by citizens, families and firms.
It includes expenditure on durable goods like $TV,$ car etc. and perishable goods like food grains, fruits, vegetables, and services like education, medical treatment, transportation and communication.
Investment Expenditure $(I) :$
It is the expenditure incurred on building of a factory, plant and machinery and necessary goods equipments for the profession are considered.
It is also known as domestic investment expenditure.
This includes
The expenditure made by productive units on ' purchase of capital goods (immovable capital creation).
Increase in stock or inventory of goods during a year.
Government Expenditure $(G) :$
It includes expenditure such as consumption expenditure, investment expenditure administrative expenditure etc. by central government and local bodies.
Government expenditure in which the government incurs for providing consumption goods and services.
Net export Expenditure:
The expenditure on import of foreign goods by the citizens of country and our export is expenditure incurred on goods by foreign citizens.
Therefore, the difference between these two is the net export which is included in the national income.
When the imports expenditure is deducted from exports, net exports can be found.
If this difference is $+$ (plus), it is to be added in national income and if it is minus, it is to be subtracted.
E.g. A country has made export of $Rs. 5,000$ crores and made import worth $Rs. 4,000$ crores, Net export can bet $Rs. 1,000$ crores. In short, Total National Income $=$ Consumption Expenditure $+$ Investment Expenditure $+$ Government Expenditure $+$ Net Export Expenditure.
The things to be considered while calculating national income by expenditure method:
To avoid double counting, interim expenses for purchase should not be considered but only the cost of final consumer goods and services must be calculated.
The transfer payment made by the Government must not be considered because the beneficiary does not provide any goods or services during the year.
For example :
Pension, unemployment allowances etc.
Transfer expenditure is not included in investment expenditure.
The purchase of share bond is also not included in production cost of the currently
Second hand goods purchased should not be included in calculation of the expenditure because it has no contribution for the current year.
The increases in stock capital must be considered.
Subsidy Expenditure is not considered for measuring national income.
Calculation :
The official data of people, cannot be obtained and therefore it is very difficult to measure national income by this method.
E.g. A employer gives $Rs. 2,000$ to employee for household expenditure.
From that amount he paid $Rs. 500$ to domestic helper, then total expenditure is $Rs. 2,000$ or $Rs. 2,500. $ It is difficult to consider that expenditure.
This method is based on expenditure behind consumption $+$ aggregate saving $=$ Total income of society.
For given period by totaling consumption expenditure and total savings we can calculate total income of the country.
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