What are the National Income Accounting Approaches?


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1.  Expenditure Approach

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This approach to national  Y accounting involves the summation of all the expenditure in an economy by the government private sectors consumption, government and private sectors investment as well as expenditure by the foreign sector.

 

Y = C + I + G + (X-M)

 

Y = national income

C= Private consumption

I = Private investment

G = Government consumption & investment

X – M = Expenditure on imports – incomes from exports.

Therefore, the sum of all these expenditures give national income figure.

 

2.  Income Approach

National income by income approach is the sum of all the incomes of the factors of production i.e. sum of wages and salaries, rent, interest etc.  this represents the value of goods and services at factor cost.

 

3.  Value Added/Product approach.

It is the summarization of all receipts of business firms in the economy.  It involves the summation of the value added at every stage of production of a good / services to avoid the problem of double counting. E.g in bread production.

 

Farmer sell wheat to miller at              4.00

Miller sells flour to baker at                            10.00

Baker sell bread to customer at                       20.00

 

Value added = 4+6+10 = 20

 

If we add receipts at every stage of production, we encounter double counting i.e. 4+10+20=34

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