Q.(a) Describe the various methods of estimating National Income of a country.

(a) National income is measured by the product, income and expenditure methods. (b) Fiscal policy uses taxation, public expenditure, public debt and deficit financing/the budget.

(a) Methods of estimating National Income

1. Product (Value-Added / Output) Method: add up the money value of all final goods and services produced in all sectors during the year, or sum the value added at each stage of production. This gives GDP; adjusting for depreciation, net indirect taxes and net factor income from abroad gives national income.
2. Income Method: add up all factor incomes earned by the residents — rent, wages and salaries, interest, and profit (plus mixed income of the self-employed). The total of factor incomes equals national income (NNP at factor cost).
3. Expenditure Method: add up all final expenditure in the economy — private consumption (C) + investment (I) + government expenditure (G) + net exports (X − M). This gives GDP at market price, which is then adjusted to national income.

All three methods should yield the same national income, since output = income = expenditure. Care must be taken to avoid double counting and to exclude transfer payments and second-hand sales.

(b) Instruments of Fiscal Policy

Fiscal policy is the government's use of its revenue and expenditure to influence the economy. Its main instruments are:

• Taxation (public revenue): raising or lowering direct and indirect taxes to control demand, inflation and inequality. …