Measurement of National Income

Measurement of National Income

The main criterion for assessing the economic growth of an economy is the increase in national income in that economy. National income is equal to the net national product at factor cost. To calculate national income, depreciation and net indirect taxes are deducted from the gross national product. National income is calculated through three methods - product method, income method and expenditure method.

1. Product Method

The method of calculating the total annual value of goods and services is known as the product method. The product method is also known as the value added method. The product method is a method of calculating national income by finding the total monetary value of goods and services produced in the primary - secondary - tertiary sectors. The product method helps in assessing the extent of participation of various sectors in national income and which sector contributes more. The value added product or the value of final goods is calculated to calculate national income. There are three main components to calculating national income in the product method.

■ Identifying and classifying the production units in the economy.

■ Calculate the net value added within the domestic borders of an economy.

■ Calculate the net income from abroad and add it to the net value added.

In order to avoid double counting in the product method, the value of intermediate products should be discounted and only the total value of final goods and services should be calculated.

2. Income Method

In the income method, national income is calculated based on the remuneration received by the factors of production in the economy. Income is the remuneration received by the factors of production. The income method helps to identify the contribution of each factor of production to the national income. The income received by all production units is distributed among the factors of production as salaries, wages, profits, interest and rent. There are four main steps in calculating national income.

■ Classify the factors of production in the economy into three sectors: primary sector, secondary sector and tertiary sector.

■ Classify domestic factor income.

■ Determine domestic factor income.

■ Add net factor income from abroad

Domestic factor income can be mainly classified into three categories.

■ Compensation of employees - This includes wages received by employees and other benefits provided by employers to employees.

■ Operating surplus - Operating surplus includes rent, profits, interest and royalties.

■ Compensation of self-employed persons - It is not possible to separate the income of self-employed persons. It is a mixed income. It includes income from workers and capital income.

3. Expenditure Method (Consumption Method)

The Expenditure Method is a method of calculating national income based on final expenditure in the economy. The Expenditure Method is a method of calculating national income by finding the total amount spent by individuals, firms and the government in a year. In economics, investment is considered as expenditure along with the expenditure on purchasing goods and services.

Total expenditure = Consumption expenditure + Investment expenditure + Government expenditure

Total domestic expenditure in an economy can be divided into the following categories:

i. Private final Consumption Expenditure - C

ii. Gross domestic Capital Expenditure - I

iii. Government's final Consumption Expenditure - G

iv. Net Export - Export (X) - Import (M)

Total domestic expenditure = C + I + G + X - M

This is equal to the gross domestic product at market prices in an economy.

GDP_MP = C + I + G + X - M

Gross national product (GNP_MP) is obtained by adding net factor income from abroad to gross domestic product (GDP_MP).

GNP_MP = GDP_MP + NFIA

To find national income using the expenditure method, it is enough to subtract depreciation (D) and net indirect taxes (NIT) from the gross national product (GNP_MP).

National Income (NNP_FC) = GNP_FC - D - NIT