Question

Explain the various methods of measuring national income.

Explain any two methods of measuring national income.

State the three methods of measuring national income.

Explain briefly different methods of estimation of national income.

Answer 1

National income is generally defined from three angles, viz. From the point of view of production, distribution and disposition. This is because National Income is always viewed at National Income = National product = National Dividend = National Expenditure i.e., NI = NP = ND = NE. As there are three views of National Income accordingly, there are three methods of estimating National Income. They are:

1. Total Output (Production Method): (also known as Value Added Method/Inventory Method)
2. Total Income Method: (also known as Dividend Method/Factor Cost Method)
3. Total Expenditure Method: (also known as Aggregate Outlay method)

1. Total (aggregates) Output (Production Method): The national income is calculated on the basis of the gross value of the final production of goods and services manufactured in various sectors, i.e., primary, secondary, and tertiary, during a given period of time.

• The primary sector is further divided in sub-sectors like agriculture, forestry, fishing, etc.
• The secondary sector is sub-divided into manufacturing, construction, gas, electricity, etc.
• The tertiary sector is further divided into banking, transport, trade, communication, hotels, etc.

The national income is calculated as follows: The value of all final goods and services produced in different sectors of the economy during a year is estimated at market price.

• (plus) The Gross Value of all Capital goods, i.e., Gross Investment in the economy during a year
• (plus) The Value of services rendered by the government, which is measured in terms of government expenditure on the purchase of various goods and services.
• (plus) Net Income from Exports, i.e., the difference between Exports (X) and Imports (M). This may be positive or negative.
• (plus) Net foreign Income (NFI), which is equal to (X) – (M) + (R – P). This may be positive or negative.
• (minus) Depreciation or Replacement Allowances or capital consumption in the country during a year.
• (minus) Indirect taxes (INT) collected by the government during a year.
• (Plus) value of substitutes given to consumers and producers during the year.

2. Total Income Method: Whenever goods and services are produced in the economy, income is also generated and distributed among the factors of production. Different factors of production are paid for their productive services rendered to an organisation; thus, labour gets wages, land gets rent, capital gets interest, and entrepreneurs get profits. The various incomes that are included in this method are:

• Wages/salaries to employees
• Rent of Land
• Interest for capital used
• Profits to the entrepreneur

3. Total Expenditure Method: The various sectors-the household sector, the business sector, and the government sector either spend their incomes on consumer goods and services or save a part of their income, or we can say that they spend a part of their incomes on non-consumption goods. These expenditures are grouped as:

• Private Consumption
• Private Investment
• Public Consumption
• Public Investment

National income = Private Consumption and Investment + Public (government) Consumption and Investment.

Answer 2

The methods of measuring national income are as follows:

1. Income method: The factor cost method is another name for the income technique of calculating national income. This method takes a distribution-side approach to national income. The following points can be used to describe this method:
   1. This approach adds up the income payments that each person of a nation receives over the course of a year. Income tax returns, reports, books of accounts, and estimates from modest income sources are the sources of the income data.
   2. This technique adds together the profits, wages, interest, and rents that land, labour, capital, and entrepreneurs have earned. Gross National Product is calculated as the sum of factor income. Nevertheless, the income obtained through transfer payments are ignored in this approach.
   3. The income technique is used by the Central Statistical Organisation’s national income committee in India to total the revenue from trade, transportation, the liberal and professional arts, public administration, and domestic services.
   4. GNP according to the income method is calculated as follows : NI  =  Rent + Wages + Interest + Profit + Mixed Income + Net income from abroad.
2. Expenditure method: The Outlay Method is another name for the expenditure method of calculating national income. This approach determines national income by adding up all of the investment and consumption expenditures made by all of the people, businesses, and government of a nation over the course of a year. Thus, gross national product is found by using the following formula: NI  =  C + I + G + (X – M) + (R – P). The following points can be used to describe the expense method:
   1. Private Final Consumption Expenditure (C): Households may spend their private final consumption money on services like transportation or healthcare or on durable items like cars, computers, televisions, and washing machines that are typically used for a longer period of time. They may also spend their money on non-durable items like food that are consumed right away. Private final consumption spending is factored into national income.
   2. Gross Domestic Private Investment Expenditure (I): It describes the money spent by private companies on upgrades, replacements, and new ventures. Gross domestic private investment expenditures are factored into national income.
   3. Government’s Final Consumption and Investment Expenditure (G): Households may spend their private final consumption money on services like transportation or healthcare or on durable items like cars, computers, televisions, and washing machines that are typically used for a longer period of time. They may also spend their money on non-durable items like food that are consumed right away. Private final consumption spending is factored into national income.
   4. Net Foreign Investment/Net Exports (X – M): This is the difference between a nation's imports and exports during a one-year period. The value of net exports is factored into national income.
   5. Net receipts (R – P): It refers to the difference between the amount spent domestically by foreigners (R) and the amount spent overseas by locals (P). The value of net receipts is factored into national income.