Question

Explain the various methods of measuring national income.

Explain any two method of measuring national income.

Answer 1

Meaning:-

National income is generally defined from three angles viz. From the point of view of production, distribution and disposition. This is because National Income is always viewed at National Income = National product = National Dividend = National Expenditure i.e NI=NP=ND=NE. As there are three views of National Income accordingly, there are three methods of estimating National Income. They are

1. Total Output (Production Method):- (also known as Value Added Method/Inventory Method)
2. Total Income Method:- (also known as Dividend Method/Factor Cost Method)
3. Total Expenditure Method:- (also known as Aggregate Outlay method)

1. Total (aggregates) Output (Production Method):-

The national income is calculated on the basis of the gross value of the final production of goods and services manufactured in various sectors. i.e., primary, secondary, and tertiary, during a given period of time.

• The primary sector is further divided in sub-sectors like agriculture, forestry, fishing, etc.
• The secondary sector is sub-divided into manufacturing, construction, gas, electricity, etc.
• The tertiary sector is further divided into banking, transport, trade, communication, hotels, etc.

The national income is calculated as follows:-

• The value of all final goods and services produced in different sectors of the economy during a year estimated at market price.
• (plus)The Gross Value of all Capital goods i.e. Gross Investment in the economy during a year
• (plus) The Value of services rendered by the government which is measured in terms of government expenditure on purchase of various gods and services.
• (plus) Net Income from Exports i.e., the difference between Exports (X) and Imports (M). This may be positive or negative.
• (plus) Net foreign Income (NFI), which is equal to (X) – (M) + (R – P). This may be positive or negative.
• (minus) Depreciation or Replacement Allowances or capital consumption in the country during a year.
• (minus) Indirect taxes (INT) collected by the government during a year.
• (Plus) value of substitutes given to consumers and producers during the year.

2. Total Income Method:-

Whenever goods and services are produced in the economy, income is also generated and distributed among the factor of production. Different factors of production are paid for their productive services rendered to an organisation, thus labour gets wages, land gets rent capital gets interest and entrepreneur gets profits. The various income that included in this method are:

• Wages/salaries to employees.
• Rent of Land.
• Interest for capital used.
• Profits to entrepreneur.

3. Total Expenditure Method:-

The various sectors-the house holds sector, the business sector and the government sector either spend their incomes on consumer goods and services or save a part of their income or we can say that they spend a part of their incomes on non-consumption goods. These expenditure are grouped as:

• Private Consumption
• Private Investment
• Public Consumption
• Public Investment.

National income = Private Consumption and Investment + Public (government) Consumption and Investment.

Answer 2

Output Method: This method measures the national income either, by taking the market value of final goods and services produced in an economy during an accounting year, or by estimating the contribution made by each of the producing units in the economy to the total production within the domestic territory during an accounting year. There are two methods of measuring national income by the output method.

i. The final goods method:  This method measures the national income by taking the market value of final goods and services produced in an economy during an accounting year.
ii. The value-added method: The value-added method measures the national income by estimating the contribution made by each of the producing units in the economy to the total production within the domestic territory during an accounting year.

This can be understood by the following example:

Production stages	Value of input	Value of output	Value added
Milk(farmer)	0	400	400
Cheese(dairy)	400	800	400
Sweets(shopkeeper)	800	1200	400
Total value	1200	2400	1200

Here, we have assumed that there is only one final product (sweets) and there are three stages of production i.e. there is milk, cheese and sweets. Also, it is assumed that milk is the only input in the production of cheese and cheese is the only input in the production of sweets.

As the final value of sweets produced is Rs 1200, national Income is Rs 1200. The value added at every stage can also be summed up to get national income. Value-added (value of output- value of input) by the farmer is Rs 400 (400 − 0). Value added by the dairy is Rs 400 (800−400). Value added by the shopkeeper is Rs 400(1200−800). Sum of all the values added also gives Rs 1200(400+400+400).

Thus, national income as per the above example is Rs 1200.

Income Method:  According to the income method, national income is estimated by aggregating all the factor incomes (in the form of wages, rent, interest and profits) paid to the owners of these factors of production (land, labour, capital and enterprise) within the domestic territory in an accounting year.
That is,
NNP_FC or National Income (NI) = Compensation of employees (COE) + Operating surplus + Mixed income +Net Factor Income from Abroad (NFIA)
Where:
Compensation of Employees (COE) includes
a. Wages and salaries paid in cash.
b. Compensation paid in kind
c. Employer's contribution to the social security schemes such as pension fund, provident fund etc.
Operating surplus includes rent, interest, royalty and profit.