Calculating National Income by Income and Expenditure Method

There are two methods for calculating national income, one is the income method, and the other is the expenditure method. The income method calculates national income by adding all the factor incomes earned by the factors of production, whereas the expenditure method calculates national income by adding all the expenditures made by the households, firms, and the government.

Factor Income from Abroad

Factor income from abroad is the income earned by domestic factors of production from foreign sources. In this case, the factor income from abroad is 10.

Compensation of Employees

Compensation of employees is the total amount paid to all the employees working in the economy. In this case, the compensation of employees is 150.

Net Domestic Capital Formation

Net domestic capital formation is the difference between gross domestic capital formation and depreciation. In this case, the net domestic capital formation is 50.

Private Final Consumption Expenditure

Private final consumption expenditure is the expenditure made by households on final goods and services. In this case, the private final consumption expenditure is 220.

Factor Income to Abroad

Factor income to abroad is the income earned by foreign factors of production from domestic sources. In this case, the factor income to abroad is 15.

Change in Stock

Change in stock is the difference between the value of closing stock and opening stock. In this case, the change in stock is 15.

Social Security Contribution by Employers

Social security contribution by employers is the amount paid by employers towards social security schemes for their employees. In this case, the social security contribution by employers is 10.

Consumption of Fixed Capital

Consumption of fixed capital is the depreciation of fixed assets used in the production process. In this case, the consumption of fixed capital is 15.

Interest

Interest is the income earned by households and firms on their savings and investments. In this case, the interest is 40.

Export

Export is the value of goods and services produced in the domestic economy and sold to foreign countries. In this case, the export is 20.

Import

Import is the value of goods and services produced in foreign countries and purchased by the domestic economy. In this case, the import is 25.

Indirect Taxes

Indirect taxes are the taxes imposed on the production and sale of goods and services. In this case, the indirect taxes are 30.

Subsidies

Subsidies are the payments made by the government to firms to encourage production and consumption. In this case, the subsidies are 10.

Rent

Rent is the income earned by households and firms by renting out their property. In this case, the rent is 40.

Government Final Consumption Expenditure

Government final consumption expenditure is the expenditure made by the government on final goods and services. In this case, the government final consumption expenditure is 85.

Profit

Profit is the income earned by firms after deducting all the expenses from the revenue. In this case, the profit is 100.

Therefore, the national income can be calculated by adding all the above components of income and expenditure:

National Income = Compensation of Employees + Net Domestic Capital Formation + Private Final Consumption Expenditure + Factor Income from Abroad + Change in Stock + Social Security Contribution by Employers + Consumption of Fixed Capital + Interest + Export - Import - Indirect Taxes + Subsidies + Rent + Government Final Consumption Expenditure + Profit

Substituting the values given in the