Economics Assignment Methods of Calculating National Income

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Economics Assignment

MEASURING NATIONAL INCOME

Methods of Calculating National Income

  • There are three methods of calculating national income:
  • The expenditure method:
  • This adds up all the spending in the economy: C + I + G + X - M.  
  • It is called Gross Domestic Product (GDP) at market prices and includes:
  • C: Consumption
  • I: Investment which includes: Planned investment in capital, Unplanned increases in stocks or inventories
  • G: Govt. spending on goods and services.  Because they are often provided free of charge (no market value), they are valued at cost.
  • X: Exports: the domestic economy receives the money
  • M: Imports: these must be subtracted because it is spending on goods and services from outside the domestic economy.

  • The income method: adds up all the sources of income in the domestic economy.  
  • Transfer payments (pensions, unemployment and welfare benefits) are excluded: no good or service is produced for the income.
  • Income includes:
  • Wages and salaries
  • Self-employed income
  • Profits: divided into dividends given to shareholders and undistributed or earnings retained by the firm
  • Rent which includes the cost of raw materials and intermediate inputs and imputed rent on any owner occupied housing
  • Interest

  • The output method:
  • Adds up the value added by a firm’s production:
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  • The value of the firm’s output minus the value of inputs
  • Alternatively this method adds up the output of final goods and services.

  • If $100 worth of goods and services has been produced (output method) this must have generated $100 worth of income (income method) for the various factors of production and will lead to $100 worth of spending (expenditure method).
  • If people do not buy some, firms end up with stocks of unsold goods which are included in investment and assumes the firms ‘bought’ the goods for themselves.
  • For this reason GDP = National Income = National ...

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