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Questions
Why are net exports added in the total expenditure in measuring National income by Expenditure method?
Why are net exports added in the total expenditure in the measurement of income by expenditure method?
Very Long Answer
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Solution
- Net exports (exports minus imports) are added in total expenditure while measuring national income by the expenditure method because they ensure that only the value of goods and services produced within the domestic territory is counted.
- Exports are included because they represent the value of domestic goods and services purchased by the rest of the world, and thus must be part of national income.
- Imports are subtracted because they represent goods and services produced abroad but consumed within the country, which are not part of domestic production.
- By adding net exports (exports - imports), we adjust for the flow of goods and services between domestic and foreign sectors and ensure that national income reflects the total value of goods and services produced within the country.
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