National Income Accounting

National Income Accounting (AO2 + AO4)

National income refers to the value of all goods and services in a given country in a given year. It indicates the level of economic activity in the country. 

There are 3 ways to measure this:

1. The Output Method (O)

• Measures the value of all finished goods and services in a country in a year. To prevent double counting, only the final product is measured, not the manufacturing process.

2. The Income Method (Y)

• Measures the value of all incomes in the country in a year. It is the sum of the results of factors of production: Wages + Rent + Interest + Profit. 

3. The Expenditure Method (E)

• Measures the value of all spending in a country in a year. It is the sum of: Household Consumption (C) + Capital Investments (I) + Government Spending (G) + Net Exports (Exports - Imports (X - M)).

• This can be expressed with the formula GDP = C + I + G + X - M

• Note that investments here means "capital expenditure on goods", not stocks and securities.

In theory, O = Y = E. However, because of inaccuracies in measuring, there is usually some slight deviation. 

What does this look like on the Circular Flow of Income?