(a) Explain the methods of measuring the national income of a country (b) State any three problems associated with measuring national income.

Answer Details

(a) Methods of measuring national income. There are three approaches, all of which should give the same total because one person's expenditure is another's income which arises from output.

• Income approach: add up all the incomes earned by the factors of production in a year, that is wages and salaries, rent, interest and profit. Transfer payments such as pensions and gifts are excluded to avoid double counting.
• Output (product) approach: add up the money value of all final goods and services produced in the country, or sum the value added at each stage of production. Only final goods, or values added, are counted to avoid double counting.
• Expenditure approach: add up all spending on final goods and services, namely consumption (C), investment (I), government spending (G) and net exports (X - M): \( Y = C + I + G + (X - M) \).

(b) Three problems of measuring national income

• Double counting: the risk of counting the value of a good more than once at different stages of production.
• Unpaid and subsistence services: goods produced and consumed at home (for example a farmer's own food) are hard to value and are often omitted.
• Inadequate and unreliable data: poor record keeping and illiteracy in developing countries make accurate statistics difficult to obtain.