Question

State the steps pertaining to the estimation of National Income, under the Expenditure Method.

Hint:

The Expenditure Method assumes that total spending in an economy directly reflects the total income generated by producing the goods and services.

Answer 1

The steps to estimate National Income using the Expenditure Method are as follows:
1. Consumption Expenditure (C): This includes all the expenditures on goods and services by households. It consists of durable and non-durable goods and services consumed by the public.
2. Investment Expenditure (I): This includes the total investment made in the economy such as business investments, construction of factories, machinery, and infrastructure. It also includes residential construction.
3. Government Expenditure (G): This includes all government spending on goods and services, excluding transfer payments such as pensions or unemployment benefits.
4. Net Exports (NX): This refers to the difference between a country’s exports and imports. It is calculated as: \[ \text{Net Exports} = \text{Exports} - \text{Imports} \] 5. Total Expenditure (E): The total expenditure is the sum of all the above components: \[ E = C + I + G + (X - M) \] where \( X \) is the total value of exports and \( M \) is the total value of imports. The national income is calculated by summing the consumption, investment, government expenditure, and net exports in the economy. This method is based on the principle that the total expenditure on goods and services equals the total income generated from their production.