MEASUREMENT OF NATIONAL PROF.

KARAN BHATT
INCOME
METHODS
There are three methods to calculate national income:
1.Product Method 2. Income Method 3. Expenditure Method
TRI METHODS
KEY POINTS – PRODUCT METHOD
Estimated by adding the value added by all the firms.
Value-added = Value of Output – Value of (non-factor) inputs
1.This gives GDP at Market Price (MP) – because it includes depreciation (therefore
‘gross’) and taxes (therefore ‘market price’)
2.To reach National Income (that is, NNP at FC)
1. Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
2. Subtract Depreciation: NNP at MP = GNP at MP – Dep
3. Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT
KEY POINTS – INCOME METHOD
Estimated by adding all the factors of production (rent, wages, interest, profit) and
the mixed-income of self-employed.
1.In India, one-third of people are self-employed.
2.This is the ‘domestic’ income, related to the production within the borders of the
country
KEY POINTS – EXPENDITURE METHOD
The expenditure method to measure national income can be understood by the
equation given below:
Y = C + I + G + (X-M),
where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G
= Govt’s expenditure on final consumer goods, I = Investment or Capital Formation,
X = Exports, I = Imports, X-M = Net Exports
Any of these methods can be used in any of the sectors – the choice of the method
depends on the convenience of using that method in a particular sector
PRODUCT METHOD
In this method two approaches-final product value of only final goods and services.
approach and value added approach are
adopted. Value Added Approach Notes This method
measures contribution of each producing
Final Product Approach It is expressed in enterprise to production in the domestic
terms of GDP. According to final product territory of a country in an accounting year.
approach, sum total of market value of all According to this method net value added at
final goods and services produced by all factor cost by all the producing units during
productive units in the domestic economy in an accounting year within the domestic
an accounting year is estimated by territory is summed up. This gives us value
multiplying the gross product with market of net domestic product at factor cost or
prices. Being gross it includes depreciation, domestic income.
being at market price, it includes net indirect
taxes and being domestic, it includes
production by all production units within
domestic territory of a country. It includes
STEPS IN PRODUCT METHOD
1. Identifying all the producing units in the domestic economy and classifying them
into the industrial sectors such as primary, secondary, tertiary sector on the basis of
similarity of activities.
2. Estimating net value added at factor cost by each producing unit deducting
intermediate consumption, depreciation and net indirect taxes from value of output.
3. Estimating net value added of each industrial sector by summing up net value
added at FC of all producing units falling in each industrial sector.
4. Computing domestic income by adding up NVA at FC of all industrial sectors.
5. Estimating net factor income from abroad which is added to domestic income for
deriving national income.
PRODUCT METHOD
Thus according to value added method,
GNP = (value of output in primary sector - intermediate consumption) + (Value of
output in secondary sector - intermediate consumption) + (Value of output in tertiary
sector – intermediate consumption) + Net factor income from abroad.
PRODUCT METHOD
INCOME METHOD
Income Method measures national income from the side of payments made to the
primary factors of production for their productive services in an accounting year.
Thus according to income method, national income is calculated by summing up of
factor incomes of all the normal residents of a country earned within and outside the
country during a period of one year.
The income generated is nothing but the net value added at factor cost by factors of
production, which is distributed in the form of money income amongst them.
Thus, if factor incomes of all the producing units generated within the domestic
economy are added up, the resulting total will be domestic income or net domestic
product at factor cost (NDPFC).
By adding net factor income from abroad to domestic income we get NNPFC.
INCOME METHOD
GNP is the addition of all factor incomes generated in production of goods and
services.
While measuring GDP we must include only those income flows that originate with
the production of the goods and services within the particular time period.
The components of factor income are:
(i) Employees' Compensation, (ii) Profits, (iii) Rent, (iv) Interest, (v) Mixed Income,
and (vi) Royalty.
Profit, rent, interest and other mixed income are jointly known as operating surplus.
Thus, National Income = compensation of employees + operating surplus.
STEPS INVOLVED IN INCOME METHOD
1. Identifying enterprises which employ factors of production (labour, capital and
entrepreneur).
2. Classifying various types of factor payments like rent, interest, profit and mixed
income.
3. Estimating amount of factor payments made by each enterprise.
4. Summing up of all factors payments within domestic territory to get domestic
income.
5. Estimating net factor income from abroad which is added to the domestic income
to derive national income.
Sale and purchase of second hand goods are excluded.
INCOME METHOD
INCOME METHOD
EXPENDITURE METHOD
GDP can be measured by taking into account all final expenditures in the economy.
There are three distinct types of expenditures as they are committed by households,
firms and Government respectively.
These expenditures are classified into following types:
1. Private consumption expenditure (C) 2. Government expenditure (Government
purchases of goods and services) (E) 3. Investment expenditure (I) 4. Net exports
(X-M)
Thus, GDP = C + I + G + (X - M)
STEPS INVOLVED IN EXPENDITURE METHOD
1. Identification of economic units 4. Estimation of net factor income from
incurring final expenditure abroad which is added to NDPFC.
2. Classification of final expenditure into Avoid double counting of goods.
following components:
Expenditure on purchase of second hand
(a) Private final consumption expenditure goods is excluded.
(b) Government final consumption
expenditure (c) Gross final capital Expenditure on purchase of old share is
formation (d) Change in stocks (e) Net excluded.
exports. Government expenditure on all transfer
3. Measurement of final expenditure on payment is excluded
the above components.
EXPENDITURE METHOD
PROBLEMS IN MEASURING NATIONAL INCOME
The problems in measurement of national income are:
National income measures domestic economic performance and not social welfare.
For real economic growth, there should be strong positive correlation between the
two.
National Income understates social welfare-non-market transactions like home-
makers service and do-it-yourself projects are not counted.
National Income does not measure an increase in leisure or work satisfaction or
changes in product quality.
National Income does not accurately reflect changes in environment like oil spills
cleanup is measured as positive output but increased in pollution is not measured as
negative
PROBLEMS IN MEASURING NATIONAL INCOME
Per capital income is a more meaningful measure of living standards than total
national income.
There is a problem of double counting. However, problem of double counting could
be avoided by utilizing the value added approach.
Problems of depreciation estimation as there are different methods of calculating or
estimating depreciation