Explain how Expenditure method is different from income method in estimation of National Income : The estimation of National Income involves various methods to calculate the total economic output of a country. Two primary methods used for this purpose are the Expenditure Method and the Income Method. Let’s discuss how these two methods differ from each other:
Expenditure Method: The Expenditure Method calculates National Income by summing up all the expenditures made in the economy during a specific period. This method focuses on tracking the total spending by different sectors, such as households, firms, government, and foreign entities, on final goods and services. The expenditures considered include consumption, investment, government spending, and net exports (exports minus imports).
Income Method: The Income Method, on the other hand, calculates National Income by summing up all the incomes earned in the economy during a specific period. This method focuses on the different sources of income generated in the production process. It takes into account various components of income, such as wages and salaries, rents, interests, and profits earned by individuals and businesses.
Key Differences:
Perspective:
- Expenditure Method: Focuses on the total spending by different sectors in the economy.
- Income Method: Focuses on the total incomes earned by individuals and businesses.
Components Included:
- Expenditure Method: Includes consumption expenditure, investment expenditure, government expenditure, and net exports (exports minus imports).
- Income Method: Includes wages, salaries, rents, interests, and profits earned by different factors of production.
Calculation Approach:
- Expenditure Method: Calculates National Income by adding up expenditures on final goods and services.
- Income Method: Calculates National Income by adding up the various forms of income earned in the production process.
Link to Production:
- Expenditure Method: Focuses on the demand side of the economy, highlighting the total demand for goods and services.
- Income Method: Focuses on the supply side of the economy, highlighting the various factors of production and their earnings.
Applicability:
- Expenditure Method: Particularly useful for analyzing the overall economic activity and the role of expenditures in driving economic growth.
- Income Method: Useful for understanding the distribution of income and wealth among different factors of production.
Both the Expenditure Method and the Income Method provide different perspectives on the economy’s performance and its distribution of income. The estimates obtained from these methods should ideally be consistent, as total expenditures in an economy should match total incomes earned. Discrepancies may arise due to measurement errors, statistical limitations, or differences in data sources, but reconciling these differences is an important aspect of accurately estimating the National Income.