Ways of Measuring National Income And Their Limitations - SS2 Economics Lesson Note

There are three main ways of measuring national income: Output, Income, and Expenditure method. However, each of these methods has its limitations. Thus, it is important to use a combination of methods to get a more complete picture of a country's economic health and to overcome the limitations of each individual method.

Output method 

This method calculates the total value of goods and services produced within a country's borders over a specific period. The output method is based on the value of goods and services produced, such as agriculture, manufacturing, and services.

Limitation

The output method can underestimate the value of goods and services that are not sold in the market, such as unpaid work done at home. It also does not account for the negative effects of production on the environment, such as pollution.

 

Income method 

This method measures national income by adding up all the incomes earned by individuals and businesses within a country's borders over a specific period. It includes salaries and wages, profits, rent, and interest.

Limitation

The income method can underestimate national income if there is a large informal sector where income is not reported or taxed. It also does not take into account non-monetary benefits such as access to public services.

 

Expenditure method 

This method measures national income by adding up all the expenditures made by individuals, businesses, and the government within a country's borders over a specific period. It includes consumer spending, investment, government spending, and net exports.

Limitation

The expenditure method can be affected by changes in the price level, making it difficult to compare national income across different time periods. It also does not account for the negative effects of imports on the economy.