MEASUREMENT OF NATIONAL INCOME

MEASUREMENT OF NATIONAL INCOME:-

Production of goods and services gives rise to income, income gives rise to the demand for goods and services, demand gives rise to expenditure and expenditure gives rise to further production. So, there is a circular flow of production, income, and expenditure. On the basis of these three related flows, national income can be measured by the following three methods which are explained as follows:-

A. Product method:-

Product method measures national income at the phase of production in a circular flow. This method measures national income from the total sum of the market value of all the final goods and services produced in the economy. In this method, the economy is divided into three sectors: Primary Sector (agriculture, forestry, fishing, mining, etc.), Secondary Sector (manufacturing, construction, electricity, water supply, gas, etc.) and Tertiary Sector (banking, transport, insurance, communication, trade, commerce, etc.). The money value of all the total product of every sector is calculated and summed up to find out GDP. This method is commonly used in many countries but there are possibilities of double counting. So, in order to avoid double counting, the following two alternative methods are used:-

1. Final product method:-

In this method, national income is estimated by finding the market value of all the final goods and services produced in an economy in a year. All the intermediate goods are excluded while calculating national income. While calculating NI through the product method there exists the problem of double – counting. In order to avoid it, only the final product should be included. The formula for calculating NI by this method is as follows:-

GDP = P1Q1+P2Q2+….. + PnQn

GNP = GDP+NFIA

NNP =  GNP – Depreciation.

NNP after factor cost = NNP – Net Indirect Taxes.

NI = NNP at factor cost.

2. Value-added method:-

             In this method, the value created at different stages of the production is counted for estimating NI. According to this method, GDP is the sum of total value added by different producing unit, of a country in their production process. Value added is the addition to the value of raw materials and other inputs during the production process.

Gross Value Added = Value of output – Cost of intermediate goods.

The following formula shows how national income is calculated by the value-added method.

GDP = Gross value added in different sectors within the economy.

GNP = GDP + NFIA

NNP = GNP – depreciation.

NNP after cost = NNP – Net indirect taxes

NI = NNP at factor cost.

B. Income method:-

             Income method measures NI from the side of factor income. This method is also known as the factor payment method. According to this method, the incomes received by all the residents of a country for their productive services during a year are added to obtain NI. This method consists of income earned by all the factors of production in the form of rent, wage, salaries, interest, etc.

The formula of calculating NI by income method is as follows:-

GDP = wages + salaries + interest + rent + profit + depreciation + net indirect taxes.

GNP = GDP + NFIA

NNP = GNP – depreciation

NNP after factor cost = NNP – Net indirect tax

NI = NNP at factor cost

Components of national income in income method:-

1. Wages and salaries:-

            Wages and salaries earned by labors and employees are included in the NI. The broad components of wages include all the form of remuneration of work.

2. Interest:-

              Interest received from the capital is included in the NI. It is expressed in the net terms rather than the gross terms.

3. Rent:-

              Rent received from land, building, factory, etc. are included in NI. It is the income earned by the persons for the use of the real property.

4. Profit:-

              Profit includes dividends, profit tax, and undistributed profit. The income earned from self – employment is also included in NI.

5. Depreciation:-

               The depreciation amount is deducted to get a net national product from the gross national product.

6. Net indirect taxes:-

                Net indirect tax is equal to indirect taxes minus subsidies. The indirect tax consists primarily of value added tax, excise and real property taxes.

7. Net factor income from abroad (NFIA):-

                 NFIA is equal to the income received by the citizens of a country from abroad minus income paid to the foreigners.

C. Expenditure method:-

                        In order to calculate NI by expenditure method, the economy is divided into four major sectors:- household, government, business, and foreign sectors. GDP is the sum total of expenditure of these four sectors on final goods and services produced in the domestic territory of a country in a year. According to this method, the sum of private consumption expenditure, private investment expenditure, government expenditure, and net export gives the GDP amount. Net exports equal to the total exports minus total imports. When the net factor income from abroad is added to GDP, GNP is obtained. NNP is obtained by deducting depreciation from GNP. Finally, NNP at factor cost is obtained by deducting Net Indirect Taxes from NNP. The calculation of NI from this method is as follows:-

GDP = C + I + G + (X – M)

GNP = GDP + NFIA

NNP = GNP – depreciation

NNP after factor cost = NNP – Net indirect taxes

NI = NNP at factor cost

Components of national income in expenditure method:-

1. Private final consumption expenditure :-

              This component consists of expenditures on consumer goods and services like expenditure on food, clothing, facilities, automobiles, medical care, etc.

2. Gross private domestic investment:-

              This component includes the total investment made by business firms like the addition of physical assets, replacement of assets, etc.

3. Government expenditure:-

              This component includes purchase by all levels of government like expenditure on security, administration, infrastructures, etc.

4. Net exports:-

             Net exports equal to the total exports minus total imports.

5. Net foreign income from abroad:-

             NFIA is equal to the income received by the citizens of a country from abroad minus income paid to the foreigners.

6. Net Indirect Taxes:-

             Net indirect tax is equal to indirect taxes minus subsidies. The indirect tax consists primarily of VAT, excise and real property taxes.

7. Depreciation:-

              The depreciation amount is deducted to get the net national product from the gross national product.

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Components of national income in expenditure method, Components of national income in income method, MEASUREMENT OF NATIONAL INCOME