There are three ways of calculating income. They are:
1. Expenditure method
2. Income method
3. Product method.
Any of these methods can used in calculating national income. But, the choice of a particular method depends on the availability of data. The three approach are:
Expenditure Approach
Expenditure approach measures national income as the aggregate of all final expenditure made by different agents of the economy during a year.
GDP=C G I (X-M), and
GNP=C I G (X-M) NFIA
Where,
C=Consumption
I=Private domestic expenditure
G=Government expenditure
NFIA=Net Factor Income from Abroad
X-M=Exports minus Imports
The expenditure account consists of the following four components:
Personal Consumption Expenditure
It includes the consumption expenditure made by individual consumers for both durable and non-durable goods and services produced in the economy.
Gross Private Domestic Investment
It includes private investment in capital goods like machinery, plant, equipment, etc. But the expenditure made on the goods and services produced in the past and the financial made in credit instrument are not included.
Government Expenditure
It includes government expenditure on national defense and social sector. But, transfer payments made by the government on social security are not included in GNP.
Net Exports
It means the difference between export earnings and import expenses. The imported goods are not produced within the country and cannot be included in national income, but exported goods are included in GNP as they are produced in the country.
