Measurement of National Income

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There are three methods of measuring national income.They are namely:

  1. Value added method (alternatively known as Product Method or Net Output Method)
  2. Income Method
  3. Expenditure Method.

1. Product or Value Added Method

In this method the value added by each enterprise in the production goods and services is measured. Value added by an enterprise is obtained by deducting expenditure incurred on intermediate goods such as raw materials, unfinished goods (purchased from other firms from the value of output produced by an enterprise.

Value of output produced by an enterprise is equal to physical output (Q) produced multiplied by the market price (P), that is, P.Q. From the value added by each enterprise we subtract consumption of fixed capital (i.e., depreciation) to obtain net value added at market prices (NVAMP).

However, for estimating national income (that is, Net National Product at factor cost (NNPFC) we require to estimate net value added at factor cost (NVAFC) by each enterprise in the economy. NVAFC can be found out by deducting net indirect taxes (i. e. indirect taxes less subsidies provided by the Government).

Under this method, the economy is divided into different industrial sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. Then, the net value added at factor cost (NVAFC) by each productive enterprise as well as by each industry or sector is estimated.

2. Income Method

The income method measures national income from the side of the payments made to the primary factors of production for their productive services in an accounting year. Like the Value Added method,this method also involves the following steps:

  1. Identifying the producing enterprises which employ factor inputs.
  2. Classifying factor payments.
  3. Estimating factor payments.

Classifying of producing enterprises done for the value added method can be used for this method also. As we have already seen,factor payments are generally classified in to the following groups:

  1. Compensation of employees
  2. Rent
  3. Interest
  4. Profit
  5. Mixed income of self employed.

Income paid out by each producing enterprise can be measured by finding out the number of units of each input employed. Compensation of employees includes income tax to be paid by the employees. While including the compensation of employees in the national income,income tax to be paid by them should not be included separately.

The sum of compensation of employees,rent,interest and profits paid to the owners of factors of production in all the producing sectors in the domestic territory of the economy is domestic factor income. To this,net factor income earned abroad has to be added to obtain national income.

3. Expenditure Method

The expenditure method tries to measure the final expenditure on gross domestic products. In other words,it measures the disposal of gross domestic product.

Final expenditure on gross domestic product consists of

  1. Private final consumption expenditure
  2. Government final consumption expenditure
  3. Gross fixed capital formation
  4. Change in inventories
  5. Net exports of goods and services.