GSEB Class 11 Economics Solutions Chapter 9 National Income

Exercise 13(A)

 

Question 1. Who gave the definition of national income by production method?
(A) Marshall
(B) Fisher
(C) Pigou
(D) Samuelson
Answer: (A) Marshall
In simple words: Alfred Marshall is credited with defining national income based on the production method, focusing on the net output of goods and services.

🎯 Exam Tip: Remembering the key economists associated with different national income definitions, like Marshall with the production method, is a common scoring point.

 

Question 2. Which among the following can be considered in GNP?
(A) Operation in hospital
(B) Work of housewife
(C) A teacher teaching his/her own child
(D) Sing a song in the bathroom
Answer: (A) Operation in hospital
In simple words: An operation in a hospital involves a professional service exchanged for money, contributing to the nation's Gross National Product, unlike unpaid or personal activities.

🎯 Exam Tip: For GNP inclusion, focus on transactions involving monetary exchange for goods and services in the market, excluding non-market activities like household work.

 

Question 3. Which among the following is not included in closed economy?
(A) Families
(B) Firms
(C) Industries
(D) Foreign trade
Answer: (D) Foreign trade
In simple words: A closed economy, by definition, has no economic interactions with other countries, meaning foreign trade is entirely excluded from its operations.

🎯 Exam Tip: Grasping the fundamental characteristics of economic models, such as the absence of foreign trade in a closed economy, is essential for foundational understanding.

 

Question 4. Which expenditure of government is not considered in national income?
(A) Production
(B) Transfer payment
(C) Wages of labourers
(D) Defence expenditure
Answer: (B) Transfer payment
In simple words: Government transfer payments, such as pensions or subsidies, are not included in national income calculations because they represent a redistribution of existing income, not new production of goods or services.

🎯 Exam Tip: Distinguish between government spending on actual production (like defence or infrastructure) and transfer payments (like unemployment benefits), as only the former counts towards national income.

 

Question 5. How many factors constitute monetary expenditure?
(A) 4
(B) 2
(C) 1
(D) 10
Answer: (A) 4
In simple words: Monetary expenditure in an economy typically arises from four key components: consumption, investment, government spending, and net exports.

🎯 Exam Tip: Remembering the four main components of aggregate expenditure (C, I, G, Nx) is fundamental for understanding how national income is measured via the expenditure method.

 

Question 6. Which one of the following is not a method to measure national income?
(A) Production method
(B) Income method
(C) Sales method
(D) Expenditure method
Answer: (C) Sales method
In simple words: The primary methods for calculating national income are the production (or value-added) method, the income method, and the expenditure method; a "sales method" is not a recognized standalone approach.

🎯 Exam Tip: Familiarize yourself with the three established methods of national income accounting – production, income, and expenditure – as recognizing which one is *not* a method is a common question type.

 

Question 7. What should be deducted from GDP to get NDP?
(A) Depreciation
(B) Net factor income from abroad
(D) Subsidy
Answer: (A) Depreciation
In simple words: To convert Gross Domestic Product (GDP) into Net Domestic Product (NDP), the value of depreciation (wear and tear of capital goods) must be subtracted.

🎯 Exam Tip: The core difference between 'gross' and 'net' economic aggregates is always depreciation; accurately applying this deduction is critical.

 

2. Answer the following questions in one sentence :

 

Question 1. What is national income?
Answer: The national income of a country is defined as the total monetary value of all goods and services produced within its agricultural, industrial, and service sectors over a one-year period.
In simple words: National income is the total monetary value of all final goods and services produced in a country in a year.

🎯 Exam Tip: A precise definition of national income, including its components and time frame, is essential for conceptual clarity.

 

Question 2. What is called closed economy?
Answer: A closed economy is one that does not engage in foreign trade or economic transactions with any other country.
In simple words: A closed economy is a self-sufficient economic system that has no international trade.

🎯 Exam Tip: Remember that the defining characteristic of a closed economy is the complete absence of international trade and capital flows.

 

Question 3. Give formula of Per Capita Income.
Answer: Per capita income is calculated by dividing a nation's gross national income by its total population.
\[ Per\ Capita\ Income = \frac{\text {Gross National Income}}{\text {Total Population}} \]
In simple words: Per capita income measures the average income per person in a country, found by dividing national income by population.

🎯 Exam Tip: Accurately stating the formula for Per Capita Income, including both the numerator (GNI) and denominator (total population), is key.

 

Question 4. What is the meaning of Net Domestic Product?
Answer: Net Domestic Product (NDP) is obtained by deducting depreciation of domestic or foreign factors of production from the Gross Domestic Product (GDP) during the production process within a given year.
\( NDP = GDP - Depreciation \)
In simple words: NDP represents the total economic output of a country after accounting for the loss in value of its capital assets due to depreciation.

🎯 Exam Tip: Clearly defining NDP as GDP minus depreciation is crucial, as it highlights the concept of net production after accounting for capital consumption.

 

Question 5. What are transfer payments?
Answer: Transfer payments are monetary transfers or income receipts for which no goods or services are directly provided in return, such as subsidies or taxes.
In simple words: Transfer payments are government payments to individuals or groups without any direct exchange of goods or services.

🎯 Exam Tip: Understanding that transfer payments are redistributions, not earnings from production, helps in correctly excluding them from national income calculations.

 

Question 6. Whether the purchase of old building can be considered in national income or not? Why?
Answer: The purchase of an old building is not included in national income because it represents a resale of a good produced in the past. Including it again would lead to double counting since its value was already considered in the national income when it was originally constructed.
In simple words: Old building purchases are resales and not new production, so they are excluded from national income to prevent double counting.

🎯 Exam Tip: Always remember to exclude transactions involving second-hand goods or assets from national income calculations to avoid overestimating current economic production.

 

Question 7. Why the service of a house wife is not included in National Income?
Answer: The services rendered by a housewife are not included in national income because these household activities are not sold in the market, making their monetary value difficult to measure accurately.
In simple words: A housewife's services are unpaid and outside the market, so their value is not counted in national income.

🎯 Exam Tip: National income primarily measures market transactions; non-market activities, even if valuable, are generally excluded due to measurement challenges.

 

Question 8. What is imputed rent?
Answer: Imputed rent refers to the estimated rental value that homeowners implicitly "pay" to themselves for living in their own homes, as they do not incur actual rental expenses. This benefit is considered part of their income.
In simple words: Imputed rent is the estimated value of housing services homeowners provide to themselves, treated as income.

🎯 Exam Tip: Knowing that imputed rent is included in national income is important as it accounts for the value of owner-occupied housing services, providing a more comprehensive measure of economic activity.

 

Question 9. Name the institution which measures national income in India.
Answer: In India, the Central Statistical Organization (CSO) is the institution responsible for measuring national income.
In simple words: The Central Statistical Organization (CSO) calculates India's national income.

🎯 Exam Tip: Identifying key government bodies responsible for economic data, like the CSO for national income in India, is often tested.

 

Question 10. At which price monetary national income is measured?
Answer: Monetary national income is typically measured at current prices.
In simple words: Monetary national income uses current market prices for its calculation.

🎯 Exam Tip: Understanding the difference between current prices (nominal) and constant prices (real) is fundamental when discussing national income figures.

 

Question 11. 'Per capita income is not the income of every citizen of the country.' How?
Answer: Per capita income is derived by a simple division of gross national income by the total population, yielding an average income per person. This average does not reflect the actual earnings of every individual, as some may earn significantly more and others considerably less.
In simple words: Per capita income is an average, so it doesn't represent the actual income earned by each individual citizen.

🎯 Exam Tip: Recognize that per capita income is a statistical average and does not account for income distribution or inequalities among the population.

 

3. Answer the following questions in short :

 

Question 1. Give definition of national income as given by Marshall or Fisher.
Answer:1. Alfred Marshall's definition (Production-based definition):

• According to Marshall, the national income of a country is the net production of physical (tangible) and non-physical (service) goods achieved within a year, utilizing natural wealth (land), capital, and labor.
• Professor Marshall emphasized net production of goods and services, thus basing his definition on output.

2. Irving Fisher (Consumption-based definition):

• Fisher defined national income as the total proportion of goods and services directly consumed by the people of a country during a year.
• Fisher's definition highlights the consumption of physical and non-physical goods and services, making it consumption-based.

In simple words: Marshall defined national income based on net production of goods and services, while Fisher defined it based on the direct consumption of goods and services.

🎯 Exam Tip: Be prepared to state and differentiate between the definitions of national income provided by prominent economists like Marshall (production) and Fisher (consumption).

 

Question 2. According to Prof. Pigou, what is called national income?
Answer: A.C. Pigou (Money-based definition):

• Professor Pigou stated that national income is the flow of goods and services for which payments have been made in money, or which can be readily measured in monetary terms. This includes the total income of society along with foreign income, all measurable with money.
• Pigou's definition places emphasis on monetary transactions, thereby basing his concept on money.

In simple words: Pigou defined national income as the sum of goods and services whose value can be measured in money, including foreign income.

🎯 Exam Tip: When discussing Pigou's definition, highlight its focus on the monetary measurement of goods and services, as this is its distinguishing feature.

 

Question 3. Which expenditures are not included in the expenditure method of National Income?
Answer: Expenditures not considered in national income:

• Expenditures on purchasing second-hand goods, transfer expenditures (such as pensions, unemployment allowances, and financial assistance to widows), etc., are not included.
• Expenditures for acquiring old shares or goods intended for interim use are not factored into national income calculations.
• Certain expenditures are incurred without the actual production of goods and services; these involve only monetary transfers and are therefore excluded. Subsidies are an example of such transfers.

In simple words: Expenditures on second-hand goods, transfer payments, old shares, and intermediate goods are excluded from national income calculations to avoid double counting and ensure only new production is measured.

🎯 Exam Tip: Knowing which expenditures are excluded (e.g., resales, transfer payments) and why (e.g., to prevent double counting) is vital for accurate national income accounting.

 

Question 4. Show the Difference between :
Answer:

 

Question 4. (a) Show the Difference between GDP and NDP.
Answer:
ℹ️ चित्र व्याख्या (Diagram Explanation): यह तालिका सकल घरेलू उत्पाद (GDP) और शुद्ध घरेलू उत्पाद (NDP) के बीच के मुख्य अंतरों को स्पष्ट करती है। इसमें दोनों की परिभाषा, गणना विधि और उनके उपयोग पर प्रकाश डाला गया है, जिससे छात्र इन महत्वपूर्ण आर्थिक अवधारणाओं को समझ सकें।
In simple words: GDP measures total production including depreciation, while NDP measures production after deducting depreciation, showing the true net output.

🎯 Exam Tip: Understanding the distinction between gross and net concepts in national income accounting, particularly regarding depreciation, is crucial for accurate economic analysis.

 

Question 4. (b) Show the Difference between GNP and NNP.
Answer:
ℹ️ चित्र व्याख्या (Diagram Explanation): यह तालिका सकल राष्ट्रीय उत्पाद (GNP) और शुद्ध राष्ट्रीय उत्पाद (NNP) के बीच के प्रमुख अंतरों को प्रस्तुत करती है। इसमें इन दोनों आर्थिक संकेतकों की परिभाषाएँ, उनकी गणना में अंतर (विशेषकर मूल्यह्रास का प्रभाव), और उनके संबंधित आर्थिक महत्व को दर्शाया गया है।
In simple words: GNP measures the total income earned by a nation's residents, including income from abroad, before depreciation, while NNP is GNP minus depreciation, reflecting the net income available for consumption or investment.

🎯 Exam Tip: Differentiate GNP and NNP based on the inclusion or exclusion of depreciation; this is a fundamental concept in understanding national income aggregates.

 

Question 4. (c) Show the Difference between GDP and GNP.
Answer:
ℹ️ चित्र व्याख्या (Diagram Explanation): यह तालिका सकल घरेलू उत्पाद (GDP) और सकल राष्ट्रीय उत्पाद (GNP) के बीच के महत्वपूर्ण भेदों को उजागर करती है। यह बताती है कि GDP भौगोलिक सीमाओं के भीतर उत्पादन को मापता है, जबकि GNP किसी देश के नागरिकों द्वारा, चाहे वे कहीं भी हों, किए गए उत्पादन को दर्शाता है, जिसमें विदेशों से प्राप्त शुद्ध कारक आय शामिल होती है।
In simple words: GDP measures economic activity within a country's borders, while GNP measures the total output produced by a country's citizens, regardless of location.

🎯 Exam Tip: The key differentiator between GDP and GNP is geographical boundary versus nationality of producers; correctly applying 'Net Factor Income from Abroad' is essential.

 

Question 4. (d) Show the Difference between Closed economy and Open economy.
Answer:
ℹ️ चित्र व्याख्या (Diagram Explanation): यह तालिका एक बंद अर्थव्यवस्था और एक खुली अर्थव्यवस्था के बीच के मूलभूत अंतरों को दर्शाती है। यह स्पष्ट करती है कि बंद अर्थव्यवस्था में विदेशी व्यापार का अभाव होता है, जबकि खुली अर्थव्यवस्थाएँ अंतर्राष्ट्रीय व्यापार, पूंजी प्रवाह और सेवाओं में संलग्न होती हैं, जिससे वे वैश्विक बाजारों से जुड़ती हैं।
In simple words: A closed economy has no international trade, while an open economy participates in global trade and financial flows.

🎯 Exam Tip: Understanding the absence or presence of international transactions (trade, capital flows) is the primary way to distinguish between closed and open economies.

 

4. Answer the following questions in brief points :

 

Question 1. Explain in brief the problems arising in measuring National Income.
Answer:

• The Central Statistical Organization (CSO) has been responsible for calculating India's national income since 1954.
• The CSO uses 1999-2000 as a base year to calculate national income at constant prices.

Problems faced by CSO during measurement are:

• Problems of double accounting
• Problems of self-consumption
• Problems of depreciation
• Tax avoidance and tax evasions
• Illegal income
• Problems of net foreign income
• Problems in accounting

Following problems arise in accounting:
(A) Illiteracy
(B) Small-scale production-sale
(C) Barter system
(D) People involved in more than one occupation
The CSO diligently addresses these issues to accurately count income and calculate national income.
In simple words: Measuring national income is complex due to challenges like double counting, accounting for self-consumption, illegal income, and issues arising from illiteracy and the barter system.

🎯 Exam Tip: When listing problems in national income measurement, categorize them (e.g., conceptual, statistical, data availability) and provide specific examples like double counting or the exclusion of non-market activities.

 

Question 2. Explain the concept of monetary income and real income.
Answer:(A) Monetary national income: Monetary national income is the current year's money value of final goods and services produced by a country's residents, measured at the prevailing prices of that year. Explanation: What is obtained is referred to as monetary national income. However, this monetary national income does not represent true income. Reason:

• Assume that in the previous year, production was 'a' and prices were 'b'. The national income for the previous year would be \( (production\ 'a') \times (price\ 'b') = ab \).
• Now, suppose current year production equals previous year's production, but prices have doubled to '2b'.
• The national income for the current year would then be \( (production\ 'a') \times (price\ '2b') = 2ab \).
• In this scenario, the current year's national income would appear double that of the previous year, which is misleading, as there has been no actual increase in production.

Drawback:

• Even though national income has increased, this increase is due to rising prices, not an actual boost in production.
• This implies that people are consuming the same quantity of goods as before. Consequently, the overall standard of living has not improved.
• Therefore, a country should not solely concentrate on monetary national income.

(B) Real national income: Real national income is calculated by valuing national income at base-year prices or fixed prices.

• Real national income is determined by multiplying the production of all goods by their fixed prices from a designated base year.
• Since real national income considers base-year prices, any increase in real national income primarily reflects an increase in production rather than mere market price fluctuations. Thus, real national income provides a more accurate picture of a country's economic situation.

Advantage: If real national income grows due to increased production, it signifies that people are consuming more products or a greater number of people are consuming them. In either case, enhanced production generally leads to higher consumption and an improved standard of living.
In simple words: Monetary income is national income calculated at current prices, showing nominal value, while real income is calculated at base-year prices, reflecting actual changes in production and purchasing power, hence showing the true economic situation.

🎯 Exam Tip: Differentiating between nominal (monetary) and real national income, and understanding how inflation distorts the former, is a critical concept in macroeconomics.

Question 2. Explain the output method for measuring national income.
Answer:

2. Imputed Rent:
- Individuals residing in their self-owned homes do not incur rent payments. The economic benefit derived from such occupancy is regarded as a component of their income and is termed imputed rent.
- This value is incorporated into national income calculations, assuming that if the property were rented out, it would generate rental income.
3. Exports:
- The aggregate value of a nation's exports is included.

(II) Incomes Not Considered:
1. Services Rendered by Homemakers:
- Domestic services provided by homemakers are not transacted in the market, making their monetary value difficult to ascertain. Consequently, these services are excluded from national income computations.
2. Self-Consumption:
- Items produced for direct personal use are not marketed, thus their monetary worth cannot be precisely quantified. Therefore, these self-consumed goods are typically omitted from national income figures.
- An exception exists for food grains cultivated by Indian farmers for personal consumption, which are, however, factored into national income calculations.
3. Defense and Police Services:
- Goods and services for defense and police operations do not have a market for commercial sale, as they are utilized directly by these sectors. Consequently, their valuation is not included in national income computations.
4. Double Counting:
- Double counting occurs when the value of a single product or expenditure is erroneously accounted for more than once.
- In the production method for national income estimation, only the value of final goods and services is considered, excluding intermediate products or those still undergoing production.
- Including intermediate goods leads to an inflated national income; therefore, measures are taken to eliminate double counting.

There are two main approaches to prevent double counting:
(a) Accounting solely for the value of final goods.
(b) Employing the Value Added Method.
5. Resale Transactions:
- A good's value, if produced in a previous period, would have been included in that period's national product. Its subsequent resale is not counted to prevent double counting.
- For instance, the resale of a property originally bought in 2000 would not be factored into the current national product.
6. Contraband and Illicit Goods:
- The monetary value of illicit or smuggled goods is excluded from national income calculations.
(III) Deductible Incomes or Items:
1. Depreciation:
- Capital depreciation, which occurs during the production process, is subtracted from the national product.
2. Indirect Taxes and Subsidies:
- Government-imposed indirect taxes on goods are added when determining their market value.
- Consequently, indirect taxes are subtracted from the national product, while government subsidies are added.
In simple words: The output method measures national income by summing the monetary value of all finished goods and services produced in an economy over a year, considering various included and excluded items.

🎯 Exam Tip: When explaining the output method, clearly define what constitutes final goods and services, and remember to distinguish between items included (like imputed rent, exports) and excluded (like household work, self-consumption of non-farm goods, double counting) in national income calculations.

 

Question 3. Define double counting and discuss remedies to remove double counting.
Answer: Double counting refers to the erroneous inclusion of the same product's value, or its corresponding expenditure, more than once in national income calculations.
Remedies for eliminating double counting:
- In the production method for national income, it is essential to consider only the value of final goods and services, excluding any intermediate products or services still in production.
- For instance, iron can be a final product for an iron manufacturer, but it also becomes a component of a machine, which is a final product for a machine manufacturer. This dual counting of iron's value leads to an overestimation.
- This overvaluation is erroneous, and therefore, double counting must be eliminated from national income accounting.
- Including a commodity's value more than once in national income leads to an inflated representation of the economy.
Approaches to Prevent Double Counting:
(A) Focusing Solely on Finished Goods:
- This method involves valuing only the completed goods, rather than semi-finished or intermediate products. The monetary value of the final good is considered, with the raw material cost valued distinctly.
- For example, if the final machine's value and the iron used in its production are accounted for separately, the issue of double counting can be resolved.
(B) Value Added Method:
- During the production cycle, a good's monetary value typically increases as it moves from one stage to the next.
- By measuring and aggregating this incremental value added at each stage into the national product, the problem of double counting can be effectively addressed.
Example:

Stage No.	Item Produced	Sales Income (Rs.)	Factor Cost (Rs.)	Increasing Value (Rs.)
1	Cotton	100	00	100
2	Yarn	200	100	100
3	Cloth	280	200	80
Total		580	300	280

- As illustrated in the table, in the initial stage, a factory acquires cotton for Rs. 100. In the subsequent stage, it transforms the cotton into yarn, sold for Rs. 200. Finally, in the third stage, this yarn is converted into cloth, which fetches Rs. 280.
- If the monetary value is computed as Rs. 100 (cotton) + Rs. 200 (yarn) + Rs. 280 (cloth) = Rs. 580 in the national product, this method leads to double counting.
- Within the Rs. 580 total, the value of cotton is embedded in both the yarn and the cloth, effectively being counted three times, which exemplifies double counting.
- However, if the value of cotton (Rs. 100), yarn (Rs. 100), and cloth (Rs. 80) is summed as value added, totaling Rs. 280, double counting is avoided.
- The preceding example highlights that the factor cost for cotton production is zero, assuming the cotton was produced in the previous year and already included in that period's national product.In simple words: Double counting is when a product's value is counted multiple times in national income. To fix this, only the final value of goods and services is included, or the value added at each stage is measured.

🎯 Exam Tip: Understanding double counting is crucial for accurately estimating national income. Focus on the distinction between final and intermediate goods and the value-added method to avoid errors in calculations.

 

Question 4. Explain the income method for measuring national income.
Answer:
Income Method:
- This approach defines national income as the aggregate sum of all incomes earned by a country's citizens and the state.
- To compute national income using this method, one sums the rent, interest, wages, and profits accrued by the four factors of production: land, capital, labor, and entrepreneurship.
- Additionally, income derived from foreign countries is incorporated, while payments for foreign factors of production utilized within the country are deducted.
- Professor Pigou developed this method for measuring national income.
Types of incomes and their role while calculating national income:
(I) Incomes that are considered:
1. Income earned from factors of production:
(A) Income from Rent:
- Rental income generated from land or buildings.
- The economic benefit received by homeowners who do not pay rent on their own dwelling is considered imputed rent and is included in national income.
- Income derived from various rights, such as copyrights for books or patents, is also included.
(B) Income from Interest:
- Interest earned by individuals on their capital over a year.
- Interest payments from the government are excluded from income calculations because they represent a mere transfer of funds, as the government generates this income via taxes.
(C) Income from Wages:
- Wages or salaries paid to laborers for their annual work.
(D) Income from Profit:
- Profits or dividends received by investors, encompassing reserved profits and taxes paid.
2. Other Incomes:
(A) Net foreign income, comprising earnings from exports minus imports.
(B) Income derived from commissions or brokerage on the sale of consumer goods.
(C) Incomes reflecting the flow of goods and services production within the economy, which contribute to an increase in the monetary value of economic output.
(II) Incomes Not Considered:
- Income from gifts, rewards, prizes, tips, thefts, unemployment benefits, government aid to the elderly, lotteries, and similar sources are excluded.
- The income generated from the sale of second-hand goods, such as used mobile phones, is not considered.
(III) Deductible Incomes:
- Government subsidies are deducted when calculating national income.In simple words: The income method calculates national income by adding up all factor incomes like rent, wages, interest, and profits earned by individuals and the state, including net foreign income, while excluding certain transfer payments and non-market incomes.

🎯 Exam Tip: When applying the income method, remember to differentiate between factor incomes (earned from production) and transfer payments (unearned income) to avoid inaccuracies. Pay attention to how foreign income and government subsidies are treated.

 

Question 5. Describe the expenditure method for measuring national income.
Answer:
Expenditure Method:
- All goods and services produced domestically are intended for final use, either by consumers for consumption or by producers for investment. The total spending in a given year constitutes the Gross Domestic Product (GDP).
- This method, developed from Professor Fisher's definition, calculates national income by summing the total monetary expenditure on final goods and services by individuals, households, firms, and the government over a year.
- Therefore, National Income = Consumption expenditure + Investment expenditure + Government expenditure + Net export expenditure.
Components Considered in the Expenditure Method:
1. Four Factors of Monetary Expenditure:
The final expenditure components included in national income are categorized into four parts:
(A) Consumption Expenditure:
- This refers to the spending by citizens, households, and firms on consumer goods.
- It encompasses spending on durable goods (e.g., televisions, scooters, cars), perishable goods (e.g., food grains, fruits, vegetables), and services (e.g., education, medical treatment, transportation, and communication).
(B) Investment Expenditure:
- This involves spending on constructing factories, acquiring plant and machinery, and purchasing essential goods and equipment required for business or professional operations.
(C) Government Expenditure:
- This includes government spending on diverse administrative services such as defense, law enforcement, and education.
- Various types of government spending, including consumption, investment, and administrative expenditures, are carried out by central, state, and local government entities.
(D) Net Export Expenditure:
- This represents the net difference between a country's exports and imports over a year.
- Spending by a country's citizens on imported foreign goods constitutes domestic expenditure, while foreign citizens' spending on domestic goods constitutes exports.
- Thus, the balance between these two, known as net export, is incorporated into national income.
2. Expenditures Excluded from National Income:
- Spending on second-hand goods, transfer payments (such as pensions, unemployment benefits, and financial aid to widows), is not included.
- Purchases of existing shares and expenditure on intermediate goods are also excluded from national income calculations.
- Certain expenditures, even when not related to current goods and services production, are also excluded. These often involve mere monetary transfers, such as subsidies.
3. Challenges in Calculating National Income via Expenditure Method:
- Obtaining precise official data on public expenditure is challenging, making accurate national income calculation difficult using this method.
Example:
- Consider Arav, a businessperson, who pays Rs. 30,000 as salary to Milap, his accountant. Milap records this as an incurred expenditure.
- Subsequently, Milap pays Rs. 3,000 to Khushbu, his domestic helper, which becomes Milap's expenditure. This raises the question of the actual expenditure: is it Rs. 30,000 or Rs. 30,000 + Rs. 3,000 = Rs. 33,000?
- This example illustrates that the issue of double counting can also arise within the expenditure method when calculating national income.In simple words: The expenditure method calculates national income by adding up all spending in an economy: consumption, investment, government spending, and net exports. It focuses on the final spending on goods and services.

🎯 Exam Tip: When using the expenditure method, ensure you only include final expenditures and correctly account for net exports. Be careful to exclude transfer payments and purchases of second-hand goods to prevent double counting.