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 Lecture Plan

❖Expenditure Method for measuring National

Income
❖Limitations of measuring national income
Learning Outcome
❖Identifying expenditure method of measuring
national income.

❖To enable the students to understand various

problems involved in the measurement of
national income.
 Let’s recall

1. What is included in product method?

What limitations are involved in its
estimation.
Precautions while estimating
factor income
1. Transfer payment

2. Income from illegal activities

3. Sale proceeds of second hand goods

4. The sale proceeds of shares and bonds are not included

in national income

5. Windfall gains should not be included.

6.Imputed rent of owner houses is included in NI

 Limitations of Income Method

❖ Exclusion of non monetary income: Ignores the non-

monetized section of economic activities.

❖ Exclusion of Non Marketed Services: People

undertake a particular activity that are difficult to ascertain
in money value. E.g. mother’s services to the family.
Polling question
• Remittances from a relative working
abroad are:

a. Included in national income

b. Not included in national income

c. Transfer payments

d. Both (b) and (c)

Expenditure method
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❖ The formula for this method is

Y = C + I + G +(X-M)

• Here Y stands for total expenditure

• C stands for consumption expenditure
• I stands for investment expenditure
• G stands for Government expenditure
• (X-M) Difference between exports and imports

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 Steps
• Identification of economic units incurring
final expenditure
• Measurement of final expenditure on the
above components.
• Estimation of net factor income from
abroad which is added to NDPFC.
• Avoid double counting of goods.
• Expenditure on purchase of second hand
goods is excluded.
• Expenditure on purchase of share is
excluded.
• Government expenditure on all transfer
payment is excluded
Polling question
• Which of the following is not an element of
final consumption expenditure:

a. Household expenditure on food

b. Government final consumption

expenditure

c. Household expenditure on education

d. Expenditure on raw material

 Limitations
❖Neglects Barter System
❖Ignores self consumption
❖double counting of goods.

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Uses of National Income Data
Difficulties in the computation of
National Income

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