Methods of Calculating National Income

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Explain the difference between the three main methods of calculating national income - by income, by expenditure and by output. What are the strengths and weaknesses of each method of measurement? References: Accounting definitions: W. Beckerman NationalIncomeandEmployment RR750 B3 The New Palgrave - national income, - social accounting R. and G. Stone National Income and Expenditure RR786 S1 Statistics: Economic Trends RRPer22 Calculating growth rates: Any elementary stats book. National income is the value of all goods produced in the economy that are final goods (i.e. not used up for producing something else). As there are two sectors in the economy - productive and household, several measures can be made that reach to roughly the same national income figure and then an average estimate can be calculated. Wages and profits reach household sector from productive sector and private consumption is returned. Value added measures the flow that leaves productive sector, national income measures the amount received by households and final demand(or expenditure) is the amount reaching the productive sector again. In theory all these measures should be the same. In the reality an item called statistical discrepancy must often be used to average out the errors. National expenditure method includes the consumers expenditure (not on houses as they are durable goods and included in fixed capital formation). This is equal to the personal disposable income (PDI)-savings. General government final consumption is the second item. It is the current consumption to be precise, no loans, transfer payments an expenditure by government institutions(harbours) is included as this simply transfers the same money from one sector to other or is included in later year GDP calculations or other sectors in this account. Gross domestic fixed capital formation

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