Question

Write short notes on:
1) Value added approach
2) Expenditure method of measuring national income.
3) Circular flow of national income
4) Personal disposable income
5) Net national product at factor cost

Answer 1

1) The value added approach measures the national income by estimating the contribution made by each of the producing units in the economy based on the total production within the domestic territory during an accounting year. The gross value added by all the producing units in the domestic territory during an accounting year is called Gross Domestic Product at market prices (GDP_MP).

2) According to the expenditure method, national income is measured in terms of the total expenditure on final goods and services produced in an economy during an accounting year. The expenditure on the final goods and services can be broadly classified into the following four categories:
1. Private final consumption expenditure
2. Government final consumption expenditure
3. Investment expenditure
4. Net exports

The aggregate of expenditure incurred on domestically produced goods and services during an accounting year gives an estimate of GDP_MP.

3) There is a continuous flow of expenditure and income and that of goods and services in an economy. For example, households receive income from the firms. They, in turn, spend this income on the goods and services produced by the firms. Thus, the expenditure of the households becomes the income of the firms. Such a continuous flow of income and expenditure or the flow of goods and services among different sectors of the economy is called the circular flow of national income.


4) Personal disposable income refers to that part of personal income that is actually available to households for consumption or for saving. Similar to the firms, the individuals also pay taxes and other payments (such as fees and fines) to the government. Such payments are deducted from the personal income to arrive at an estimate of the personal disposable income. This is because such payments are not available to the individuals for consumption or saving.

Personal Disposable Income = Personal Income – Direct Personal Taxes – Miscellaneous Receipts of the Government (fees and fines)

5) Net National Product at Factor Cost or National Income (NNP_FC) refers to the aggregate of all factor incomes earned by the factors of production (normal residents of a country both within the domestic territory as well as abroad).