[Commerce Class Notes] on Expenditure Method and Income Method Pdf for Exam

Understanding the basic concepts of income and expenditures, assets and liabilities, profit and loss are of high importance not only for the examination purposes but also for all the proper functioning of organizations and their success. hence provides you with an article that will help you understand more regarding the Expenditure Method and Income Method that will help you not only as a part of the syllabus but will also help you understand its application that will be needed in the future work environment. These concepts also govern some of the important aspects of the economy and hence if you would like to know more about the economy it is safe to say that you need to understand the basics of Expenditure Method and Income Method.

Before proceeding further, with the Expenditure and Income method of calculating national income, let us know what National Income is? 

What is National Income?

National Income is also termed as National Income at factor cost indicating a total amount of income that is earned by resources for the corresponding contribution towards labor, land, capital as well as organizational ability.

The methods of national income for computation would have to necessarily take into consideration the sum of the income accrued from production factors in the form of wages, rent, profit and interest.

The National Income Formula may Comprise:

National Income = Net National Product + Subsidies – Indirect Taxes

Or, Gross National Product – Depreciation + Subsidies – Indirect Taxes

Or, National Income = C + G + I + (X – M) + NFIA – Depreciation – Indirect Taxes + Subsidies 

[Where, 

C = Consumption

G = Government expenditure 

I = Investment

X – M = Export minus Import

NFIA = Net Factor Income from Abroad]

On dividing the National Income by population, the per capita income can be found out. The above figure shows that per capita income in 2019 has grown at the fastest rate reaching 11.1%.

The methods of national income accounting include both income and expenditure methods for calculation.

Income Method of Calculating National Income

The income method formula takes into consideration that the measurement of National Income is representative of the flow of income factor. The four elements of production in this regard include:

1. Land (which receive rent)

2. Labor (which receive salary/wages)

3. Capital (which receive interest)

4. Entrepreneurship (which receive profit in the form of remuneration)

The Formula of Income Method is:

National Income = Employees’ compensation + Net income + Operating surplus (W + R + P + I) + Net Factor Income generated from abroad

[Where,

W = Salaries and Wages

R = Rental income

P = Profit 

I = Mixed Income]

Expenditure Method of National Income

The expenditure method is one of the effective ways of national income accounting in which the measurement of the same is taken as a flow of expenditure from government consumption, net exports, and gross capital formation.

The Formula is –

National Income = C + G + I + NX

[Where,

Household consumption is represented by C

Government expenditure is represented by G

Investment expense is represented by I

Net exports are represented by NX]

If you seek to know more about methods of national income accounting, you are advised to attend our online classes. You can avail of solved questionnaires, study materials in PDF format, and a host of other resources.