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Revision: National Income >> Methods of Measuring National Income Economics ISC (Commerce) Class 12 CISCE

Definitions [2]

Classical Definitions: National Income

"The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. This is the true net annual income or revenue of the country or national dividend." - Marshall
"National income is that part of the objective income of the community, including of course income derived from abroad, which can be measured in money." - Pigou
"The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environments. Thus, a piano or an overcoat made for me this year is not a part of this year's income, but an addition to capital. Only the services rendered to me during this year by these things are income." - Fisher

Modern Definitions: National Income

"National income estimate measures the value of commodities and services turned out during a given period, counted without duplication." - N.I.C. of India
"National income is the sum of wages, rent, interest and profit or the sum of all goods and services produced by the economy during one income period." - Shapiro

Formulae [4]

Formula: Net Value Added at Factor Cost

Value of Gross Output – Intermediate Consumption – Depreciation – Net Indirect Taxes

Formula: National Income

Net Value Added at factor Cost (Net Value Added at factor cost of Primary Sector + Secondary Sector + Tertiary Sector) + Net Factor Income from Abroad

Formula: National Income by Income Method

National Income (NI) using this income method is expressed as:

Where:

: Rent (including imputed rent of owner-occupied houses and income from government property)
: Wages and salaries (compensation of employees)
: Interest
: Profits (including distributed, undistributed, and corporate tax)
: Mixed income of self-employed (where labour and capital income cannot be separated)
: Net exports (exports minus imports of goods and services)
: Net receipts from abroad (net income from abroad, such as factor income received from the rest of the world minus factor income paid abroad)

In words, national income is the sum of all domestic factor incomes plus net exports and net factor receipts from abroad.

Formula: National Income by Expenditure Method

National Income (NI) or Gross National Product at market prices can be written as:

Where:

$C$ : Private Final Consumption Expenditure
$I$ : Private Domestic Investment Expenditure
$G$ : Government Final Consumption and Investment Expenditure
$(X - M)$ : Net Exports (Exports minus Imports)
$(R - P)$ : Net Receipts from abroad on account of goods and services

Key Points

Key Points: Precautions in the Estimation of National Income by Expenditure Method

Include all final goods, even if no market expenditure is made (self-consumption, imputed rent, own-account production).
Exclude intermediate goods to avoid double counting.
Exclude second-hand goods (only ownership transfer).
Exclude financial assets like shares and bonds.
Exclude transfer payments (pensions, subsidies, etc.).
Value change in inventories at current prices.
Method is difficult in developing countries due to lack of reliable expenditure data.

Key Points: Alternative Methods of National Income Estimation

Social Accounting Method:
Developed by Richard Stone; classifies economic transactions of producers, traders, consumers to estimate national income.
Combined (Mixed) Method:
Uses two or more methods together to get accurate estimates; used in developing countries (India since 1948–49).

Key Points: Reconciling The Three Methods Of Estimating National Income

Product, Income and Expenditure methods give the same national income, difference is only the level of measurement.
Product method measures value added, Income method measures factor incomes, and Expenditure method measures final spending.
After adding net indirect taxes, depreciation, and net factor income from abroad, all lead to GNP at market price.
Hence, GNP = GNI = GNE.

Key Points: Transactions Included in National Income

Goods for self-consumption (e.g., farmers’ produce) are included (imputed value).
Broker’s commission on sale of old goods is included (new service).
Imputed rent of owner-occupied houses is included.
Defence, police, and government services are included.
Income of professionals (actors, singers, dancers) is included.
Employer’s PF contribution, pensions, dividends, and income of self-employed are included.

Key Points: Components of Net National Product at Factor Cost in its Three Phases

Method	Main Components	Adjustments	Final Result
Output Method	Gross Value Added (Primary + Secondary + Tertiary)	− Depreciation− Net indirect taxes+ Net factor income from abroad	NNP at Factor Cost
Income Method	Compensation of employeesOperating surplusMixed income	+ Net factor income from abroad	NNP at Factor Cost
Expenditure Method	Private consumptionGovernment consumptionCapital formationNet exports	− Depreciation− Net indirect taxes+ Net factor income from abroad	NNP at Factor Cost

Key Points: The Identity of Output, Income and Expenditure

In national income accounting:

National Product ≡ Income Generated ≡ Total Expenditure

Output produced creates factor incomes (wages, rent, interest, profit).
These incomes are spent to buy output.
Hence, output = income = expenditure by definition.

In practice, small differences arise due to data limitations, so a statistical discrepancy is used to reconcile the three methods.

Key Points: Significance of three Methods

Output method: Shows sector-wise contribution to production.
Income method: Shows distribution of income among factors.
Expenditure method: Shows consumption, investment, and government spending.
Using all three gives a complete picture and cross-checks accuracy.
In countries like India, methods are often combined due to lack of data.

Key Points: Transactions not Included in National Income

Second-hand goods: Already counted in the year of production.
Shares, bonds, debentures: Financial transactions, not production.
Illegal income / black money: Not officially recorded.
Windfall & capital gains: No current production involved.
Transfer payments: Scholarships, pensions, gifts, unemployment allowance, financial help, pocket money.
Indirect taxes: Not factor income.
Intermediate goods: Used in production (e.g., factory electricity, vegetables).
Capital losses: Due to floods, earthquakes, etc.
Housewives’ services & leisure activities: Non-market services.