Methods of Measurement of National Income - Expenditure Method

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Expenditure Method :
This method of measuring national income is also known as Outlay Method.
According to this method, the total expenditure incurred by the society, in a particular year, is added together. Income can be spent either on consumer goods or on capital goods. Thus, we can get national income by summing up all consumption expenditure and investment expenditure made by all individuals, firms as well as the government of a country during a year.
Thus, gross national product is found by adding up

NI = C + I + G + (X–M) + (R–P) 


1) Private Final Consumption Expenditure (C) :
Private Final Consumption Expenditure (C) by households on non-durable goods, such as food, which are used immediately; expenditure on durable goods such as car, computer, television set, washing machine etc., which are generally used for a longer period of time; and expenditure on services like transport services, medical services, etc.
2) Gross Domestic Private Investment Expenditure (I) :
It refers to expenditure made by private businesses on replacement, renewals and new investment (I).
3) Government Final Consumption and Investment Expenditure (G) :
i) Government's final consumption expenditure refers to the expenditure incurred by government on various administrative services like, law and order, defence, education, health etc. 
ii) Government's investment expenditure refers to the expenditure incurred by government, on creating infrastructural facilities like construction of roads, railways, bridges, dams, canals, which are used by the business sector for production of goods and services in any economy (G). 
4) Net Foreign Investment/Net Exports :
It refers to the difference between exports and imports of a country during a period of one 
year.
5) Net Receipts (R-P) :
The difference between expenditure incurred by foreigners on domestic goods and services (R) and expenditure incurred abroad by residents on foreign goods and services (P).

Precautions:
1) Expenditure on all intermediate goods and services should be ignored, in order to avoid 
double counting. 
2) Expenditure on the repurchase of second hand goods, should be ignored, as it is not 
incurred on currently produced goods. 
3) Expenditure on transfer payments like scholarships, old age pensions, unemployment allowance etc., should be ignored. 
4) Expenditure on repurchase of financial assets such as shares, bonds, debentures etc., 
should not be included, as such transactions do not add to the flow of goods and services.
5) Indirect taxes should be deducted. 
6) Expenditure on final goods and services should be included. 
7) Subsidies should be included.
Out of these methods, the Output Method and Income Method are extensively used. 
In advanced countries like U.S.A. and U.K. the Income Method is popular. Expenditure 
Method is rarely used by any country because of its practical difficulties. In India, the Central Statistical Organization (CSO) adopts a combination of both output method and income method to estimate national income of India.

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