Page 29 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Profit, rent, interest and other mixed income are jointly known as operating surplus. Thus,
National Income = compensation of employees + operating surplus.

Steps Involved

1. Identifying enterprises which employ factors of production (labour, capital and
entrepreneur).

2. Classifying various types of factor payments like rent, interest, profit and mixed income.
3. Estimating amount of factor payments made by each enterprise.
4. Summing up of all factors payments within domestic territory to get domestic income.
5. Estimating net factor income from abroad which is added to the domestic income to
derive national income.

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Caution

Sale and purchase of second hand goods are excluded.
Imputed rent of owner occupied houses and production for self-consumption are
included.
Incomes from illegal activities are not included.

Direct taxes such as Income tax are paid by employees from their salaries are included.
2.3.3 Expenditure Method

GDP can be measured by taking into account all final expenditures in the economy. There are
three distinct types of expenditures as they are committed by households, firms and Government
respectively. These expenditures are classified into following types:
1. Private consumption expenditure (C)
2. Government expenditure (Government purchases of goods and services) (E)
3. Investment expenditure (I)
4. Net exports (X-M)

Thus, GDP = C + I + G + (X - M)
Steps Involved

1. Identification of economic units incurring final expenditure
2. Classification of final expenditure into following components:
(a) Private final consumption expenditure
(b) Government final consumption expenditure
(c) Gross final capital formation

(d) Change in stocks
(e) Net exports.
3. Measurement of final expenditure on the above components.
4. Estimation of net factor income from abroad which is added to NDPFC.

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