national income accounti

2.  Product (or) Final output approach
 Income approach
 Expenditure approach
Above 3 approaches will give same result

3.  Add up the market values of all goods and
services produced.
 Ignores intermediate goods and second hand
sales of goods
 This avoids double counting

4.  The income approach is shown on one half of the
circular flow.
 Firms make factor payments to households for
supplying their services as factors of production.
 Households spend the income they earn on goods
and services

5.  Expenditures approach is calculated by adding up all the
expenditures made on final goods and services produced within the
geographical boundaries of a region.
 These include consumption expenditure (by households),
 Investment expenditures (by businesses),
 Government expenditures (on purchase of goods and services)
 Net expenditures by foreigners (i.e. net exports which in turn equals
total exports minus total imports).
 Formula - GDP = C + I + G + (X − M)

6. Imagine an economy with only two businesses, called Orange.Inc and Juice.Inc. Orange.Inc
owns and operates orange groves. It sells some of its oranges directly to the public. It sells
the rest of its oranges to Juice.Inc, which produces and sells orange juice. The following
table shows the transactions of each business during a year.
Orange.Inc Transactions
Wages paid to Orange.Inc employees $15,000
Taxes paid to government 5,000
Revenue received from sale of oranges 35,000
Oranges sold to public 10,000
Oranges sold to Juice.Inc 25,000
 Juice.Inc Transactions
 Wages paid to Juice.Inc employees $10,000
 Taxes paid to government 2,000
 Oranges purchased from Orange.Inc 25,000
 Revenue received from sale of orange juice 40,000

7. Product method:
Orange.Inc produces output worth $35,000 and Juice.Inc produces output worth $40,000. However, measuring overall
economic activity by simply adding $35,000 and $40,000 would “double count” the $25,000 of oranges that Juice.Inc
purchased from Orange.Inc and processed into juice. To avoid this double counting, we sum value added rather than output:
Because Juice.Inc processed oranges worth $25,000 into a product worth $40,000, Juice.Inc’s value added is $15,000
($40,000 – $25,000). Orange.Inc doesn’t use any inputs purchased from other businesses, sot its value added equals its
revenue of $35,000. Thus total value added in the economy is $35,000 + $15,000 = $50,000.
Income approach:
The income approach measures economic activity by adding all income received by producers of output, including
wages received by workers and profits received by owners of firms. As you have seen, the (before‐tax) profits of
Orange.Inc equal its revenues of $35,000 minus its wage costs of $15,000, or $20,000. The profits of Juice.Inc equal its
revenues of $40,000 minus the $25,000 the company paid to buy oranges and the $10,000 in wages to its employees,
or $5,000. Adding the $20,000 profit of Orange.Inc, the $5,000 profit of Juice.Inc, and the $25,000 in wage income
received by the employees of the two companies, we get a total of $50,000, the same amount determined by the
product approach.
Expenditure approach:
Expenditure approach measures activity by adding the amount spent by all ultimate users of output. In this example,
households are ultimate users of oranges. Juice.Inc is not an ultimate user of oranges because it sells the oranges (in
processed, liquid form) to households. Thus ultimate users purchase $10,000 of oranges from OrangeInc and $40,000
of orange juice from Juice.Inc for a total of $50,000, the same amount computed in both the product and income
approaches.