Explain the three methods of measuring national income and the difficulties involved.

1. 1 · Define national income and GDP. The value of final goods and services produced in a year; output = income = expenditure.
2. 2 · Draw the circular flow. [Diagram: households and firms linked by the goods market and the factor market; money flow one way, real flow the other; leakages and injections shown]
3. 3 · Output (value added) method. Sum of value added in all sectors; example: tea chain adds Rs. 1,000, not Rs. 2,500.
4. 4 · Income method. Wages + rent + interest + profit; exclude transfer payments.
5. 5 · Expenditure method. C + I + G + (X − M); exclude second-hand and financial transactions.
6. 6 · Show the links between aggregates. GDP 8,300 → GNP 8,100 → NNP 7,500 → national income 6,700; real GDP 6,640.
7. 7 · Difficulties.
   • Double counting
   • Informal sector and non-market work
   • Self-consumed output
   • Depreciation and price changes
8. 8 · Sri Lankan link and conclusion. DCS publishes GDP; tea exporters raise value added by packing in Sri Lanka. GDP is a guide to output, not a full measure of welfare.

Scoring tip: Write the three formulas on separate lines. Examiners scan for them.