Question

State the precautions while using expenditure method to measure national income.

What are the main precautions which should be taken while calculating national income?

Answer 1

Precautions regarding the calculation of national income by the expenditure method are

1. National income estimation should include only the final goods and services. Intermediate consumption expenditure should not be included.
2. Expenditure on the purchase of second-hand goods should not be included in the national income estimation of the current accounting year. This is because it has already been included in the national income of the accounting year in which these goods were originally purchased.
3. Expenditure on shares and bonds is not included. This is because these shares and bonds are mere financial assets and do not reflect any production activity of the goods or services.
4. Imputed values of the goods and services produced for self-consumption are included.
5. Expenditure on transfer payments by the government should not be included. This is because such payments are not related to any production activity in an economy.
6. The value of subsidies should be included.

Answer 2

The following precautions must be observed while calculating national income:

1. The value of goods produced for self-consumption should be accounted for.
2. The production of fixed assets for own use must be included.
3. Imputed rent of self-occupied houses should be considered in the estimation.
4. Services performed by housewives, such as cooking and childcare, should be excluded.
5. Transactions involving second-hand goods should not be counted.
6. Buying and selling of shares and bonds should be excluded from national income.