University of the Punjab

Department of Economics
Subject: Macroeconomics
Topic: Prove that Income,
Expenditure and Product Approach
are same.

Assignment Submitted to: Maria Faiq

Assignment Submitted by: Iqra Tahir
Class: MSc. Economics(M)
Roll No: M-10
Session :2019-2021
INTRODUCTION
Primarily there are three methods of measuring national
income. Which method is to be employed depends on the availability of
data and purpose. The methods are product method, income method
and expenditure method. Product method is given by Dr. Alfred
Marshall, income method by A.C. Pigou and expenditure method by Dr.
Iriving Fisher.

DEFINITIONS
The national income of a country can be measured by
three alternative approaches:
(i) Product Approach
(ii) Income Approach, and
(iii) Expenditure Approach
1. PRODUCT APPROACH
In this approach, national income is measured as a flow of goods
and services. We calculate money value of all final goods and services
produced in an economy during a year. Final goods here refer to those
goods which are directly consumed and not used in further production
process.

2. INCOME APPROACH

Under this approach, national income is measured as a flow of

factor incomes. There are generally four factors of production labour,
capital, land and entrepreneurship. Labour gets wages and salaries,
capital gets interest, land gets rent and entrepreneurship gets profit as
their remuneration.
 3. EXPENDITURE APPROACH
In this method, national income is measured as a flow of
expenditure. GDP is sum-total of private consumption expenditure.
Government consumption expenditure, gross capital formation
(Government and private) and net exports (Export-Import).

NUMERICAL EXAMPLES OF THREE APPROACHES

The national income accounts are based on the idea that
the amount of economic activity that occurs during a period of time can
be measured in terms of:
1. The amount of output produced, excluding output used up in
intermediate stages of production (the product approach).
2. The income received by the producers of the output (the income
approach)
3. The amount of spending by the ultimate purchasers of output (the
expenditure approach).

Each approach gives a different perspective on the economy.

However, the fundamental principle underlying national income
accounting is that, except for problems such as incomplete or
misreported data, all the three approaches give identical
measurements of the amount of current economic activity.
We can illustrate why these approaches are equivalent by an
example. Imagine an economy with only two businesses, called
Orangen.Inc and juice.Inc. Orange.Inc owns and operates orange
groves. It sells some of its oranges directly to the public. It sells the rest
of its orange to Juice.Inc, which produce and sells orange juice. The
following table shows the transactions of its business during a year
 ORANGEINC TRANSACTIONS ₦
Wages paid to Orange.Inc employees 15,000
Taxes paid to government 5,000
Revenue received from sale of oranges 35,000
Orange sold to public 10,000
Oranges sold to Juice.Inc 25,000

JUICEINC TRANSACTIONS
Wages paid to juice. Inc employees 10,000
Taxes paid to government 2,000
Revenue receive from sells of orange juice 25,0000
Oranges purchase from Orange.Inc 40,000

What is the total value, measured in naira, of the economic

activity generated by these two businesses? The product approach, the
income, and expenditure approach are three different ways of arriving
at the answer to this question; all yield the same answer.
1. Orange.Inc produces output worth 35000 and juice. Inc produces output
worth 40000. However, measuring overall economic activity by simply
adding 35000 and 40000 would “double count” the 25000 of oranges that
juice. Inc purchase from Orange.Inc and process into juice. To avoid this
double counting, we sum value added rather than output: because juice.
Inc process orange worth 25000 into a product worth 40000, juice. Inc
value added is 15000 (40000-25000). Orange.Inc doesn’t used any inputs
 purchase from other businesses, sot its value added equals its revenue of
35000.Thus total value added in the economy is 35000+15000=50000.
2. (Before tax) profit of Orange.Inc equal to its revenue of 35000 minus its
wage cost of 15000, or 20000. The profit juice. Inc equals its revenue of
40000 minus the 25000 the company paid to buy oranges and the 10000 in
wage to its employees, or 5000. adding the 20000 profit of Orange.Inc, the
5000 profit of juice. Inc, and the 25000 in wage income received by the
employees of the two companies, we get a total of 50000, the same
amount determine by the product approach.
3. Household are the ultimate user of oranges. Juice.Inc is not the ultimate
user of oranges because it sells the oranges (in processed, liquid form) to
households. Thus, ultimate users purchase 10000 of oranges from
Orange.Inc and 40000 of oranges of oranges juice from juice. Inc for a total
of 50000, the same amount computed in both the product and income
approaches.

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