Method of Measuring National Income

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Method of Measuring National Income

The total aggregate income of the people of a country earned during an accounting year has been defined as National Income. It is also measured in the terms of the total output that a country produces in a year. Out of the many classical economists, Marshall defined it in the term of the total production in a country, that is gross National Product of a fiscal. Pigou defined it in the terms of total disposable income of the people that in Net National Product at Factor Cost (NNPFC) and Fisher calculated it in the terms of total consumption of the people of a country. The modern definition includes all the features given by Simon Kuznet. There are four different method of measuring national income.

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Method of Measuring National Income

The goods and services that are produced by the production units consist of four factors of production, that are, land, labour, capital and entrepreneurship. These factors of production get remuneration known as rent, wage, interest and profit respectively. This income received by them is spent on the purchase of goods and services from the production units for the purpose of consumption and investment. Thus, production generates income, and that income induces consumption and expenditure on investment which leads to further production.

For these different phases, the four different method of measuring national income is done by:

(a) Product Method

(b) Income Method

(c) Expenditure Method

(d) Value Added Method

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Product Method of Measuring National Income

Under this Method of measuring national income, the total production of all the goods and services, produced in an year in a country is added to reach an aggregate value from which the value of intermediate goods are deducted so as to avoid double counting. Only the final goods and services are taken into account. This total is teamed as Gross National Product (GNP).

Depreciation is also deducted from the GNP to arrive at the Net National Product (NNP) which is a true measurement of National Income through the product method. The only and major problem with this method that there may be some error of double counting due to which the accurate value of national income may not be derived.

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Income Method of Measuring National Income

This method is used to measure national income at distribution level. Under this, national income is measured by adding incomes earned by all the factors of production during an accounting year.

It adds up the wages, rent, interest, profits and mixed income of the self-employed, earned by the factors through their services in a year at various sectors of the production units. It is termed as Gross Domestic Product at Factor Cost (GDPFC) from which the indirect taxes are deducted to arrive at Net Domestic Product at Factor Cost (NDPFC). The factor income from abroad are added and finally we get the Net National Product at Factor Cost (NNPFC) or the National Income.

With this method of measuring national income the problem is that there may be ignorance of adding all the benefits in kind or even the accurate value of the benefits provided in kind to the employees may be difficult to estimate. There is also a chance of adding up of transfer payments such as gifts, donations, fines, incomes from lotteries, etc, which brings the factor of  error into the estimation.

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Expenditure Method of Measuring National Income

Under this method of measuring national income, final expenditure on gross domestic product at market price is added together. Expenditure on final goods and services is called the final expenditure. All the three sectors of the economy, that is, primary, secondary and tertiary sectors, make the factors that create the demand for final goods and services.

At first, private final consumption expenditure, Gross investment and net exports, that is (exports-imports) got estimated. The sum total of that estimate is termed as gross domestic products at market price (GDPMP).

The deduction of depreciation and net indirect taxes from the Gross Domestic Product at Market Price (GDPMP) gives us the Net Domestic Product at Factor Cost (NDPFC). Then, the net factor income from abroad is added to get the national income that is Net National Product at Factor Cost (NNPFC).

Expenditure on intermediate products and gifts, donations etc (transfer payments) must not be included in the calculation of national income by expenditure method of measuring national income. Also, expenditure done on second hand goods and bonds and shares must not be included in national income as they cause error in actual value of national income.

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Value Added Method of Measuring National Income

Under this method of measuring national income is calculated at each level of production. This means, at first, the production units are divided into three sectors,  that are the primary sector, the secondary sector and the tertiary sector. The primary sector includes production units which use natural resources for production such as agriculture, forestry, fishing, mining, etc.

The secondary sector involves producing units that transforms inputs into output, that is, wood in chair, milk into its sub products etc.

The tertiary sector includes the production of all kinds of services such as education, banking, transportation, etc.

After this division, total volume of goods produced in multiplied by its prices to get gross value added. The value of intermediate goods, depreciation and net indirect taxes are deduced from the gross value to arrive at net value added at factor cost. Now, at find stage, we add up the value of the net value added of all the last of all the three sector and at last of all the three sectors. This gives is the Net Domestic Product at Factor Cost (NDPFC).

Now, we have added up the net factor income from abroad and got the Net National Income at Factor Cost or the National Income.

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