Page 226 - DECO405_MANAGERIAL_ECONOMICS

Unit 14: Calculation of National Income

Database is the weakest for unorganised sectors of the economy such as unregistered Notes
manufacturing, trade, hotels and restaurants and a variety of personal services. For these sectors
rough and ready estimates based sometimes on production approach, sometimes on income
approach are used. Most often estimates are obtained for a benchmark year during which a
major survey had been conducted and then these benchmark estimates are brought up to date
using a variety of indicators.
Constant price estimates using the income approach are obtained by updating the base year
estimates using some physical indices such as amount of electricity sold, tonne-kilometres of
freight transport, etc.

Did u know? What is transaction in the parallel economy?
The unaccounted flows of money give rise to black money which takes the form of push
money, hush money, hiss money, speed money and so on. Such money either circulates
very fast or gets converted into black property or assets like farm houses, gold ornaments
and benami share certificates. These are the forms in which black money is held, if not
circulated by way of black income to finance black expenditure.

14.3 Expenditure Approach

This method is known as the final product method. According to this method, the total national
expenditure is the sum of the expenditure incurred by the society in a particular year. The
expenditures are classified as personal consumption expenditure, net domestic investment,
government expenditure on goods and services and net foreign investment (imports-exports).
The flow of total expenditure can be measured by aggregating the flows of expenditure on final
goods and services incurred by the three main sectors involved, viz., the household sector, the
business sector, the government sector. Thus from the viewpoint of the expenditure approach,
national income can be measured by
NI = E + E + E
h b g
Where E , E , E denote the annual flow of expenditure on final goods and services incurred by
h b g
the household sector, the business sector, and the government sector.
These three approaches to the measurement of national income yield identical results. They
provide three alternative methods of measuring essentially the same magnitude. If we follow
the product approach or the expenditure approach, we are in effect trying to measure national
income by the size of the income flow in the upper half of the circle. As against this if we follow
income approach, we are actually trying to measure the flow in the lower half of the circle.

Notes Estimates of national product can also be obtained by adding together
expenditure flows, viz., C, I, G, E and subtracting M. To obtain these, CSO uses the commodity
flow approach. For instance, in case of private consumption expenditures, over 160 goods
and services are identified and quantities of these entering private consumption are
estimated by deducting from quantities produced, quantities used up in intermediate
uses, purchased by government, etc. Market prices are then applied to the quantities to get
expenditures. For organised construction, value of output is estimated by estimating the
quantities of major construction materials, cement, steel, bricks, etc., used up in construction.
Similarly, several items of machinery and equipment are identified and market value of
their outputs are added together to estimate capital formation in the form of machinery
and equipment.

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