Question

Explain the precautions that should be taken while estimating national income by expenditure method.

Answer 1

Precautions Regarding Calculation of National Income by Expenditure Method
1. Expenditure on only final goods and services should be included in the national income estimation while intermediate consumption expenditure should not be included.
2. Similarly, expenditure on the purchase of second hand goods should not be included in the national income estimation of the current accounting year. This is because they have already been included in the national income of the accounting year in which they were originally purchased.
3. Expenditure on shares and bonds is not included. This is because these are mere financial assets and do not reflect any production activity of the goods or services.
4. Imputed value of the goods and services produced for self consumption are included.
5. Expenditure on transfer payments by the government should not be included. This because such payments are not related to any production activity in an economy.