Consider this simplest macroeconomic model:
In an economy People don’t save. They don’t pay taxes. All of them work in a firm, which make products. People work in this firm and manufacture products. At end of month, the firm pay them salary. The same salary is used to buy product of the same firm they work in. Firm receives back the same amount for products sold, which they had given as salary.
Let us say firm has given salary to 10 person, 10 rupees each. Firm gave total rs 100.
People for their consumption buy products from firm of same amount, i.e rs 100. Firm again at end of month give all of them, rs 100 and cycle continues.
What is common in above example ?
First thing is product worth rs 100 are manufactured, which is monthly output of economy.
Second, People receive rs 100 as total income, which is same as output.
Third thing is, the expenditure in economy is rs 100, which is again same as output.
Hence to find national income, we can:-
a) Measure the expenditure, which firm will receive for the goods produced. This will be known as expenditure method.
b) Measure value of total goods produced by the firm. This will be our product or value-added method.
c) Measure the total income received in economy. This will be our Income method.