Methods of Measurement of National Income

Meaning: National income is the money value of final goods and services produced by the normal residents of a country during an accounting year.

Methods of Measurement of National Income:

These are the methods used to measure national income from the side of production, income, and expenditure.

Production generates income, income creates expenditure, and expenditure again leads to production. This continuous process is called the circular flow of income and forms the basis of all three methods of measuring national income.

Three Phases

• Production of goods and services.
• Income generation for factors of production.
• Expenditure on goods and services.

• Output or Product Method – measures national income from the production side. Output Method is also called Value Added Method or Net Product Method.
• Income Method – measures national income by adding factor incomes.
• Expenditure Method – measures national income from spending on final goods and services.

Why All Three Give the Same Result:

All three methods measure the same national income because production creates income and income leads to expenditure. They are three different views of the same economic activity.

Suppose bread is produced and sold in the market:

• Measuring the value of bread produced gives the Output Method.
• Measuring wages, rent, interest, and profit earned gives the Income Method.
• Measuring money spent by consumers on bread gives the Expenditure Method.