Previous years Questions

• Discuss the concept of national Income.

• What are the different methods of measuring
national income
• Discuss the importance of National income
• Discuss its relevance to business/Discuss the
utility of national income accounting for
business decisions

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 NATIONAL INCOME

• THE TOTAL INCOME EARNED WITHIN A

COUNTRY.
• NATIONAL INCOME IS THE TOTAL
VALUE A COUNTRY’S FINAL OUTPUT OF
ALL NEW GOODS AND SERVICES
PRODUCED IN ONE YEAR. 
• The money value of all goods and services
produced in a country during a year is called
National Income
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IMPORTANCE OF NATIONAL INCOME FOR
BUSINESSES

• MEASURING THE LEVEL AND RATE OF GROWTH OF

NATIONAL INCOME (Y) IS IMPORTANT FOR SEEING:
• THE RATE OF ECONOMIC GROWTH
• CHANGES TO AVERAGE LIVING STANDARDS
• CHANGES TO THE DISTRIBUTION OF
INCOME BETWEEN GROUPS WITHIN THE
POPULATION
• BUSNIESS CYCLES TRENDS AND BUSINESS PLANS
ARE BASED ON THE ABOVE INFORMATION

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RELATIONSHIP BETWEEN NI AND GDP

• NI=GDP- Capital Consumption Adjustment -

Indirect Business Taxes 
- Business Transfer Payments + Net Foreign
Factor Income 
+ Government Subsidies less Current Surplus
of Government Enterprises 
- Statistical Discrepancy
[HENCE FIRST STEP IS TO MEASURE GDP USING 3 METHODS]

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 THREE APPROACHES of
MEASURING/ACCOUNTING-NI

NATIONAL EXPENDITURE =NATIONAL

OUTPUT = NATIONAL INCOME
• THREE METHODS OF
ACCOUNTING/MEASURING
• 1. EXPENDITURE APPROACH
• 2. INCOME APPROACH
• 3. OUTPUT /PRODUCT /PRODUCTION
APPROACH
 SPENDING /expenditure APPROACH-
ref to “B”in the diagram of the notes

• THE SPENDING APPROACH DIVIDES

GDP INTO FOUR AREAS:
HOUSEHOLDS (C-CONSUMPTION),
BUSINESSES (I-INVESTMENT), (G-
GOVERNMENT), AND (NET EXPORTS
X EXPORTS-M IMPORTS).
The relation between GDP
Y = C + I + G + net X.
[Net X=X exports-M imports]

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 EXPENDITURE METHOD

• Expenditure method: The total final

expenditure incurred on goods and services is
added up is called expenditure method of
calculation of national income. Expenditure
method looks at the demand side of the
products . Consumers , investors and
Government’s purchase of goods and services
.

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 THE TWO-SECTOR MODEL OF THE ECONOMY
(Ref to diagram of the notes –to be used for 6marks Q)

Productive resources
Factor market

Income

Household Firms sector

sector
Goods and Services
Product market
Expenditure

15-8
 EXPENDITURE APPROACH
ref to “B”in the diagram of the notes

GDP = C + I + G + (X- M)
C = Household spending/ Private consumption
expenditure
I: Capital Investment expenditure
G: Government spending /expenditure
X: Export  of Goods and Services
M: Imports of Goods and Services
 CONCEPT OF INVESTMENT (I)

• Investment reflects the spending of

businesses and includes fixed business
investment such as Factory buildings-
machinery , power plants etc, inventory
investment, and investment in residential
buildings.

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 GOVERNMENT PURCHASES (G)

• GOVERNMENT PURCHASES OF GOODS

AND SERVICES
[Arms/Medicines/construction of roads/bridges etc]

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 NET EXPORTS (X)

NET EXPORTS (EXPORTS OF TEA ,

SOFTWARE ETC AND IMPORTS OF
CRUDE OIL , GOLD ETC}

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 2nd method
Income method
Ref to “A”of the diagram of the notes

INCOME METHOD: THE SUM TOTAL OF

THE EXPENDITURES IN AN ECONOMY
MUST BE EQUAL TO THE TOTAL
INCOMES RECEIVED BY ALL THE
FACTORS OF PRODUCTION TAKEN
TOGETHER IS CALLED INCOME
METHOD
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The Income Method – adding together factor incomes-
refer to “A”in the diagram of the notes
• GDP is the sum of the incomes earned through the
production of goods and services. This is:
• Income from people in jobs and in self-employment 
+
Profits of private sector businesses 
+
Rent income from the ownership of land
= 
Gross Domestic product (by factor incomes)

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 Income method

• This method approaches national income from

the distribution side.Households supply the
factors of production.They receive income in
the form of wages,rent,interest and profit.
• GDP=w+r+I+π
• W-wages;r-rent:I-interest: π-profit

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 Product /production method
Refer to “C” of the diagram
• Product method : measuring the aggregate value
of final goods and services produced by all the
firms
• The product method is followed in two ways
• A) The final good method:According to this
method the value of all final goods and services
produced in different sectors is included and the
value of intermediate goods are ignored.

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 Product method
2nd part -contd
• The production approach looks at GDP from
the standpoint of value added by each input in
the production process.
• Value Added method is another method of
calculation of NI [part of product method]
• Value Added method : The difference between
the value of final outputs and inputs at each
stage of production is called the value added.
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THE PRODUCTION APPROACH

• Value added is the increase in the value of

goods or services as a result of the
production process
• Value added = value of production - value
of intermediate goods
•

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 Production Approach
(Value-added Approach-example)
• GDP= sum of value-added
1. Farmers’ value-added
= $2 (Wheat) – 0 (Cost) = $2
2. Flour-making factory
= $3.5 (Flour) - $2 (Wheat) = $1.5
3. Bakery Shop
= $6 (Bread) - $3.5 (Flour) = $2.5
Result of three approaches/methods

• The three approaches--spending, income, and

production– (should) result in equivalent
values for GDP.

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 3. Real GDP and Nominal GDP

Real GDP= Nominal GDP -INFLATION

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The Circular Flow of Income and Expenditure -use for 10 marks

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 Production Approach
(Value-added Approach)

• GDP= sum of value-added of RPUs

1. Farmers’ value-added
= $2 (Wheat) – 0 (Cost) = $2
2. Flour-making factory
= $3.5 (Flour) - $2 (Wheat) = $1.5
3. Bakery Shop
= $6 (Bread) - $3.5 (Flour) = $2.5
Production (Valued-added) approach

• Measures the total market value of all final

goods and services
• To avoid double counting, valued-added
method is used.
 Real GDP

To remove the effects of price change,

We have Real GDP,
= GDP at constant market price
= Price in base year x Output in current year
 DIFFERENCES BETWEEN GDP
AND GNP
GROSS DOMESTIC PRODUCT?
AGGREGATE MONEY VALUE OF ALL
FINAL GOODS AND SERVICES
PRODUCED WITH IN THE COUNTRY
DURING A YEAR IS CALLED GROSS
DOMESTIC PRODUCT. [GDP]
 

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• GROSS NATIONAL PRODUCT (GNP).The
aggregate money value of all final goods and
services produced by a country in a year
including net income from abroad
• GDP = C + 1+ G + net X
• GNP = C + 1+ G +(X-M) +(R-P)
• NNP=GNP-Depreciation cost
• (R - P) is the net income earned by the nationals of the country i.e., difference
between income received from abroad (R) and income paid to foreigners (P).

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 Try to understand the following

• Real national income

• Per capita income
• Real GDP
• Nominal GDP

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