Question

“Under national income accounting, why should the income method be equal to the expenditure method? Is that always true? Discuss.” (150-200 words)

You must first demonstrate your understanding on this:

income method = expenditure method

Next, you have to discuss if income is always equal to expenditure, or not.

Give Real Life example.

Answer 1

• National income refers to the production of goods and services during the accounting year. National income can be measured when it is created (value added method), when it is distributed (income method) or when it is spend (expenditure method).
• Production factors such as land, labor, capital and entrepreneurship assist in production of goods and services and these factors are get paid equal to goods and services created. Further, income received by these factors is spent in consumption and investments. Hence, income is equal to expenditure. Thus, it does not matter whether national income is estimated through income method or expenditure method. Both methods provide same result.
• Generally, statistics department of country uses different methods to calculate national income to ensure that inconsistent results are not displayed by different methods.
• Typically, national income estimates in developing countries may produce two different figures in two different methods. Such results are gained due to fall deficiency of reliable data.