Question

Explain the precautions required to be taken in estimating national income from expenditure.

Answer 1

1. Include all final products irrespective of payment: All final goods and services should be included in national income even if no expenditure is actually incurred on them. For example, goods produced for self-consumption (such as food grains consumed by farmers themselves) must be assigned an estimated market value. Similarly, imputed rent for owner-occupied houses and own-account production of machinery and equipment should be included as they represent consumption of services or investment by the owner rather than market transactions.
2. Exclude expenditure on intermediate goods: Expenditure on intermediate products must be excluded because their value is already embodied in the price of final products. Including intermediate goods expenditure along with final goods expenditure would lead to double counting.
3. Exclude expenditure on second-hand goods: The national income accounts measure value added in the current year. Expenditure on second-hand goods reflects only a transfer in ownership and does not represent current production and hence should be excluded.
4. Exclude expenditure on financial assets like shares and bonds: These transactions represent transfers of ownership and do not involve production of goods or services, so they are excluded from national income.
5. Exclude government transfer payments: Payments made by the government without any corresponding production (such as social security benefits, pensions, scholarships) are transfer payments. They do not reflect payment for goods or services produced in the current period and must be omitted from national income.