It should be noted that the expenditure approach measures the total value of all, expenditures on goods and services by individual private businesses and public sector (governments) in a particular period of time. In order to avoid double counting, all expenditures on intermediate products should not be included in the measurement.
This can be symbolically stated thus:
Y = C + I + G + (X – M) OR
Y = C + I + G + Xn
Where
Y = The value of national income
C = Aggregate consumption expenditure I = Private investment expenditure
G = Government expenditure X = Exports expenditure M = Imports expenditure X= Net exports (Xn > 0)
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Alternatively, national income may be computed using the output - expenditure method.
The output - expenditure method calculates the total expenditure required to purchase the nation's output. In a spend thrift economy (an economy where all income is spent on goods and services for current consumption and all current output is consumed) national income may be calculated via the output - expenditure approach by measuring the actual expenditure of households on currently produced goods and services.
The expenditure approach considers GDP in terms of expenses incurred on purchases of goods and services produced by a country. The expenditure approach sums the expenditure from the four main economic agents in the country which are the households, the firms, the government and the rest of the world. More so, these are four main categories of expenditure and these are Personal Consumption Expenditure, Gross Private
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Domestic Investment, Government Consumption and Government Gross investment consumption, Net Exports (X – M).
TABLE 3.5
Analysis of Components of the Expenditure Approach
National Income Million Naira Personal Consumption Expenditure 50 Durable goods 20
Nondurable goods 25 Services 5 Gross Private Domestic Investment (I) 100 Non-residential 40 Residential 45 Change in business inventories 15 Government Consumption & Gross Invest 80 Federal 49 State and Local 31 Net Exports (X – M) 30 Exports (X) 20 Imports (M) 50 Gross Domestic Product 200
The expenditure approach calculates GDP by adding together all these four component of spending.
In equation form, GDP = C + I + G + (X-M). The four components of the expenditure approach are depicted in the table above.
Self Assessment Exercise
Discuss the three basic approaches to measuring GDP 3.4. National Income Measurement Problems
There are several problems that are encountered in the computation of NI, some of these problems are:
1. Problem of double counting: the greatest difficulty in measuring national income is that of double counting, which arises from the improper distinction between final and an intermediate product. There is always the possibility of a good or a service being included more than once.
2. There is also the difficulty of defining “nation” in national income. Although every nation has its political boundaries, the income earned by nationals of a country in a foreign country beyond the territorial boundaries of that country is also included in national income.
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3. The problem of measuring non-market or domestic activities: national income is always measured in monetary value, but there are a number of goods and services that are difficult to measure or assess in terms of money and are therefore excluded. Such activities include house works, child care, driving one’s car etc., they are excluded in GDP even though, they amount to real production. However, if one decides to send his/her children to the day-care, or hire a cleaner or a chauffeur to drive his/her car, GDP will increase because the salaries of day-care staff, cleaners and chauffeurs would be counted in GDP whereas, the time spent by individuals in doing the same activities is not counted. Excluding all such activities will make national income to be less than what it should actually be.
4. Income earned through illegal activities also makes national income to be less, because they are excluded from GDP.
5. Measuring national income in monetary terms leads to the underestimation of real national income. This is because national income measured in monetary value does not include the leisure forgone in the process of production of a commodity.
For instance, if two individuals earn the same amount as income but if one of them works for longer hours than the other, it would be right to state that the real income of this individual has been understated.
6. Some public services cannot be estimated correctly. For example, how should police and military services be estimated? In days of war, the forces are active but during peace, they rest in their cantonment. Also, measuring the contribution of profits earned on certain projects such as power project and irrigation to national income in terms of money is a difficult task.
Self Assessment Exercise
Differentiate between Income Approach, Value added Approach and Expenditure Approach of national income.
4.0 Conclusion
In this unit national income accounting was examined and it was seen as the total value a country’s final output of all new goods and services produced in one year.
However, the terms of national income was discussed such as Gross Domestic Product, Gross National Product, Net National Product, Domestic Product, Personal Income, Disposable Income, Nominal and Real Gross Domestic Product.
5.0 Summary
The unit vividly takes a look at National Income Accounting, and a deep explanation of the term was discussed at length. However, simple calculation of National Income was examined with various terms. It is at this point that you must have learnt a lot from this unit on National Income Accounting.
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6.0 Tutor-Marked Assignment
1. Discuss in detail the various methods we can use to measure national income.
2. Differentiate between Gross National Income and Gross Domestic Product, do you think there is similarities between them.
3. List and Explain the importance of National Income Accounting 4. Discuss the Problem of National income measurements.
7.0 References/Further Readings
Ansari, M, Gordon, D.V. and Akuamoah, C. (1997) Keynes Versus
Wagner: Public Expenditure and National Income for Three African Countries, Applied Economics 29, 54 3-550.
Folawewo A. (2009) Introductory Economics (2009), Ibadan Distance learning Series, university Press Ibadan.
Jhigan M. L (2004) Monetary Economics, 6th edition, vrinda Publication Limited, Delhi.-110091.
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UNIT 2 CONSUMPTION, SAVINGS AND INVESTMENT ANALYSIS