There are three methods by which national income can be calculated. These methods include output approach(which is also known as production methods), the income approach and the expenditure approach. In the output approach, the total output is calculated which is equivalent to the value of the goods and services used in the production process. The formula of production method is as follows:
GDP at market price = Value of Output in an economy in a particular year - Intermediate consumption
NNP at factor cost = GDP at market price - Depreciation + NFIA (Net Factor Income from Abroad) - Net Indirect Taxes
Production Method; for calculating the national income with the help of this method, net output of various commodities and services is estimated and is evaluated at the market rates or prices. In the first stage we estimate the monetary value of all the commodities which are produced internally.
For it, we take the production in different sectors like agriculture , manufacturing trade and commerce, transport etc, we also deduct the depreciation and wear and tears of the capital. In the second stage, we take into account the foreign transactions. From the value of goods imported we deduct the value of the foreign transactions . From the value of goods imported we deduct the value of goods exported . We add or subtract this form the value of the domestic production and we obtain national product. To arrive at national income we deduct the total revenue of the government from indirect taxes.
Income method This method measure the national income when it has been distributed among the various factors of production. Therefore, this is calculated at the factor cost. In this method, the various factors of production are classified in a few broad groups. We estimate the income of each group. The income, which the various factors of productions receive, can be known from the income records of various firms.