measurement of national income national income · measurement of national income measurement of...

MEASUREMENT OF NATIONAL INCOME

MEASUREMENT OF NATIONAL INCOME

PRODUCTMETHOD

INCOMEMETHOD

EXPENDITUREMETHOD

INCOME METHOD

In this method, we measure National income from the demand side.

The sum of final expenditures in the economy must be equal to the income received by al l the

factors of production taken together.

INCOME METHOD

It gives the idea that the revenues earned by al l the firms put together must be distributed among the

factors of production as RENT, WAGES, INTEREST and PROFIT. Here depreciation charges and Net

indirect taxes are included in gross profit.

INCOME METHOD

Let Wi be the wages and salaries received by

the i- th household in a particular year. Similarly Pi, In

i,

Ri be the Gross profits, interest payments and rents received by the i-th household in a particular year,

Therefore GDP is given by

Here,

Then

INCOME METHOD

Thus, we can summarise the measurement of National Income in three identities as

GDP≡

Let us see how the households dispose off their earnings. There are three major ways for it.

a) They consume it (C)b) Pay taxes (S)

c) They save it (T)

Then GDP ≡ C + S + T

Comparing with the expenditure method, we can find that

C + I + G + X – M C + S + T≡

Cancel ling C from both sides,

I + G + X M S + T – ≡

(I S) + (G T) M X – – –

If it is re arranged

≡

G T is the difference between the Government –income and expenditure.

When the Government expenditure is more than the income, it is cal led Budget Deficit.

M X stands for the difference between import –expenditure and export income. If import

expenditure is more than export revenue, it is cal led Trade Deficit.

If there is no Government, there wil l be no foreign trade. Then

G = 0, T = 0, M = 0, X = 0.Here I = S.

Aggregate savings is equal to aggregate investment.