Explain three approach which determine the national income
There are three main approaches used to determine national income: the production approach, the expenditure approach, and the income approach.
1. Production approach: This approach calculates national income by summing up the value of all goods and services produced within a country during a specific time period. It considers two types of production: value added in the manufacturing sector and income earned in the non-manufacturing sectors. The production approach takes into account the value of final goods and services, as well as intermediate goods and services. It calculates national income by adding up gross value added in various sectors, including agriculture, manufacturing, construction, and services.
2. Expenditure approach: This approach determines national income by summing up the total spending in an economy during a specific time period. It considers four major components of expenditure: consumption, investment, government spending, and net exports. Consumption expenditure includes purchases of goods and services by households. Investment expenditure includes spending on capital goods, such as machinery and equipment, by businesses. Government spending includes purchases of goods and services by the government. Net exports represent the difference between exports and imports of goods and services. By summing up these components of expenditure, the expenditure approach estimates national income.
3. Income approach: This approach calculates national income by summing up all the incomes earned by individuals and businesses within a country during a specific time period. It takes into account different sources of income, such as wages and salaries, rental income, profit, interest, and dividends. The income approach includes both labor income (wages and salaries) and capital income (rent, profit, interest). By aggregating these various sources of income, the income approach estimates national income.
These three approaches are interconnected and provide different perspectives on the measurement of national income. They help economists and policymakers analyze the economic performance and welfare of a country.