Question

Explain any two precautions to be kept in mind while estimating National Income by the Expenditure method.

Hint:

Write two precautions with reasons. Do not count intermediate goods (double counting) and do not count purchases of shares or bonds (paper claims).

Answer 1

Step 1: Understand the expenditure method:
The expenditure method adds up all the money spent on final goods and services produced inside the domestic territory in one year.
Care is needed so that no item is counted twice and nothing that is not production is counted.

Step 2: Precaution 1: leave out spending on intermediate goods:
Intermediate goods are goods bought by firms to use up in further production, such as flour bought by a bakery.
Their value is already inside the price of the final good. If we count both, the same value comes in twice, which is double counting.
So only expenditure on final goods is included.

Step 3: Precaution 2: leave out purchase of financial assets:
Buying shares, bonds or debentures only changes the owner of a paper claim. No new good or service is produced.
These deals do not add to the current flow of goods and services, so they are not part of national income.
Only real expenditure on newly produced goods and services is counted.

Final Answer:
Two precautions are: (1) do not include intermediate goods, to avoid double counting, and (2) do not include purchases of financial assets, as they are mere paper claims.
\[ \boxed{\text{No intermediate goods, no financial assets}} \]