1. Production Approach (Value-Added Method)

  1. The production approach calculates national income by adding the value added at each stage of production across all industries.
  2. Value added is the difference between the value of output and the value of intermediate goods.
  3. Formula: National Income = Gross Value of Output - Value of Intermediate Consumption.
  4. It measures the contribution of each sector: primary, secondary, and tertiary.
  5. Excludes double counting by considering only the final value of goods and services.
  6. Suitable for analyzing sector-wise contributions to the economy.
  7. Challenges include estimating the informal sector's output accurately.

2. Income Approach

  1. The income approach calculates national income by adding all factor incomes earned by households.
  2. It includes wages, rents, interest, and profits earned in the production process.
  3. Formula: National Income = Compensation of Employees + Operating Surplus + Mixed Income of Self-Employed.
  4. Focuses on the distribution of income among labor and capital.
  5. Also accounts for net factor income from abroad (NFIA).
  6. Helps analyze the income inequality in an economy.
  7. Challenges include underreporting of incomes, especially in the informal sector.

3. Expenditure Approach

  1. The expenditure approach calculates national income by adding all expenditures made on final goods and services.
  2. Formula: National Income = C + I + G + (X - M), where C = consumption, I = investment, G = government spending, and (X - M) = net exports.
  3. It reflects the aggregate demand in the economy.
  4. Includes household consumption, business investment, government spending, and net exports.
  5. Excludes expenditures on intermediate goods to prevent double counting.
  6. Challenges include accurately estimating consumption patterns and government expenditures.

4. Key Comparisons

  1. The production approach focuses on the supply side of the economy.
  2. The income approach emphasizes the earnings of production factors.
  3. The expenditure approach highlights the demand side of the economy.
  4. All three methods should ideally produce the same national income figure.

Key Points

  1. National income measures the total economic activity of a country.
  2. The production approach calculates national income based on value added.
  3. Formula for production approach: National Income = Gross Value of Output - Value of Intermediate Consumption.
  4. The income approach calculates national income by summing all factor incomes.
  5. Income approach formula: National Income = Compensation of Employees + Operating Surplus + Mixed Income of Self-Employed.
  6. The expenditure approach calculates national income through total spending on final goods and services.
  7. Expenditure approach formula: National Income = C + I + G + (X - M).
  8. The production approach avoids double counting by considering only final goods and services.
  9. The income approach highlights the distribution of income among labor and capital.
  10. The expenditure approach reflects the aggregate demand of the economy.
  11. National income from all three methods should be equal in theory.
  12. Double counting is avoided by excluding intermediate goods in all methods.
  13. The production approach provides insights into sectoral contributions.
  14. The income approach helps analyze income inequality.
  15. The expenditure approach reveals the demand pattern across households, businesses, and the government.
  16. All three methods are essential for a comprehensive understanding of national income.

Category

Questions

  1. Which method calculates national income by adding value added at each production stage?
  2. The expenditure method calculates GDP by summing:
  3. The income method includes which of the following components?
  4. Which of the following is NOT included in the expenditure method of calculating GDP?
  5. The production approach calculates GDP based on:
  6. What is the primary focus of the income method?
  7. In the expenditure method, net exports are calculated as:
  8. Which of the following is excluded in the income approach?
  9. What is double counting, a common issue in the production approach?
  10. The formula for GDP using the expenditure method is:
  11. Which approach considers goods and services produced during a specific period?
  12. Which of the following is a component of the income method?
  13. The value-added approach subtracts what from the gross output?
  14. Which of these is a limitation of the income approach?
  15. What does the term "gross investment" represent in the expenditure approach?
  16. Which method of GDP calculation directly accounts for all spending in the economy?
  17. The income method excludes:
  18. The production approach is also known as:
  19. Which of the following is a limitation of the expenditure method?
  20. Which of the following is NOT a part of national income in the income method?
  21. GDP at market prices is derived from the expenditure method by including:
  22. Which component of the income method is related to earnings from entrepreneurship?
  23. In the expenditure method, household consumption is represented as:
  24. The value-added approach avoids which problem in national income accounting?
  25. Which of the following is used in the income method but not in the expenditure method?
  26. The production approach to GDP is particularly useful in:
  27. Which is a critical weakness of the production approach?
  28. In the income method, "rent" refers to:
  29. Which component is a part of government spending in the expenditure method?
  30. The expenditure approach measures: