In an over simplified equation as above only private consumption and private investment values have been taken care of. But actually, there are two more categories of expenditure which make significant contributions to national income accounts. These are in the form of public spending or government expenditure (G) and foreign trade. Under the foreign trade sector a variety of to and fro transactions are continuously taking place. These are called imports (M) and exports (X). Whereas imports are liabilities for which the government has to pay to foreign producers, exports are assets for which payments are received. Therefore the value of imports tends to reduce and value of exports tends to enhance the national wealth or income. We therefore take account of the net worth (X - M) of foreign trade and make adjustments in the national income accounts.

The expenditure method is a useful device to collect and present information. Under this approach, we are only required to take account of the expenditure of the final products. We have therefore to exclude all such expenditure on intermediate goods and services. In this way double counting of intermediate goods can be avoided because of which, the national income estimate would be highly exaggerated in its value. In this respect, like the earlier two methods, this also has its limitations.

a) As noted earlier, those who receive pension, insurance and other benefits contribute to expenditure but do not contribute in a country’s productive activities in any way. All such expenditure will have to be set aside from the national income accounts.

b) On the other hand, part of the income genuinely earned may not be spent at all and not even be saved and deposited with the banks. Such a practice is called hoarding of income or of purchasing power. The national income accounts cannot be satisfactory to the extent of such hoarded income.

iv) Summary table: Let’s present income and expenditure methods of national income accounting in the form of a summary. But before we do so we have to introduce two adjustment factors which we have not taken account of so far. These are in the form of depreciation charges (D) and indirect taxes (IT). Market prices of goods and services are marked to the extent of indirect taxes and depreciation charges. Therefore these values form part of the aggregate expenditure. But they are not present in the aggregate income under the income method of measurement. Therefore in order to strike a balance between the two methods either we have to deduct (D + IT) from the expenditure side or add it to the income side. We have then :

[next page]

Index

3. 1 Macro Aggregates
3.2 Unemployment
3.3 Inflation

Chapter 4