Methods of measuring national income

Overview

Recall questions on the income, output and expenditure methods of measuring national income, transfer payments, nominal and real income, GDP and GNI, and understatement of activity.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Why must national income, national output and national expenditure be equal?

   Model answer

   They measure the same flow at three different points, because everything produced is sold, and the money spent on it becomes income for those who produced it.

2. 2

   Name the three methods of measuring national income.

   Model answer

   The income method, the output or production method, and the expenditure method.

3. 3

   What does the income method add up, and what must be left out?

   Model answer

   It adds up all factor incomes earned from producing output, namely wages, rent, interest and profit, leaving out transfer payments such as pensions and benefits.

4. 4

   Why are transfer payments excluded from national income?

   Model answer

   No good or service is produced in exchange for them, so including them would count income a second time after it had already been earned in production.

5. 5

   What does the output method sum, and how does it avoid double counting?

   Model answer

   It sums the value added by each firm at each stage of production rather than the total value of its sales, so the value of bought-in inputs is not counted twice.

6. 6

   State the expenditure method formula for gross domestic product and explain each term.

   Model answer

   Gross domestic product equals C + I + G + (X − M), that is consumption plus investment plus government spending plus exports minus imports.

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