What are the three methods of measuring national income? Explain the expenditure method.

There are three methods of measuring national income -

I. Value Added Method

II. Income Method

III. Expenditure Method

According to the method national income is measured in terms of expenditures on the purchase of final goods and services produced in the economy during the accounting year.

Expenditure method involves the following steps-

I. Identification of economic units incurring final expenditure, e.g., household (or consuming) sector, firm (or producing) sector and government sector.

II. Classification of final aggregate expenditure into following components:

A. Private final consumption expenditure.

B. Government final consumption expenditure.

C. Gross domestic capital formation.

D. Net exports.

III. Measurement final expenditure on the above components. Sum total of the above four items gives us the value of GDP at MP

GDP_MP = Govt. Final consumption expenditures + Private final Consumption expenditure + Gross Domestic Capital Formation + Net Exports.

IV. By deducting depreciation and net indirect taxes from GDP at MP we get NDP at FC. Estimation of net factor income from abroad which is added to NDP at FC (Domestic Income) to obtain NNP at FC (National Income).

NNP_FC (National income) = GDP_MP – Depreciation + net factor income from abroad – net indirect taxes