Measurement of national income in an economy is very important because it gives an estimation of the welfare of the economy. National income is the total of the value of the goods and the services which are produced in an economy. The basic measures of national income include GDP, GNP, GNI, NNP and NNI. There are three approaches through which national income can be calculated including; output approach, income approach and expenditure approach. All of these approaches give the same value of the national income.
The method for calculating National Income by Output, Value Added method:
GDP at market price = Value of Output in a year - Intermediate consumption
NNP at factor cost = GDP at market price - Depreciation + NFIA (Net Factor Income from Abroad) - Net Indirect Taxes
The measurement of National Income by Income Method:
NDP at factor cost = compensation of employee + operating surplus + Mixed income of self employee
National Income = NDP at factor cost + NFIA (net factor income from abroad)
The measurement of National Income by Expenditure Method:
GDP = C + I + G + (X - M)
C = Personal consumption expenditures
I = Gross investment
G = Government consumption
X = Gross exports
M = Gross imports
We have three methods to measure national income.
1. Total output method .
In this method we take the summation of monetary value of final goods and services produce in a economy during a year.
2. Factor income method.
IN THIS METHOD WE TAKE THE SUMMATION OF REWARDS OF FACTORS OF PRODUCTION IN A ECONOMY DURING YEAR
3. TOTAL EXPENDITURE METHOD.
IN THIS METHOD WE TAKE THE SUMMATION OF TOTAL EXPANDATURES BY THE PRODUCERS OF PRIVATE SECTOR AND GOVT SECTOR IN AN ECONOMY DURING A YEAR.
Explain the method of measuring the national income of your country
The output approach
The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces.
Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in total output. This avoids an issue often called 'double counting', wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production. In the example of meat production, the value of the good from the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that should be included in final national output should be $60, not the sum of all those numbers, $100. The values added at each stage of production over the previous stage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating the value of final output.
GDP(gross domestic product) 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
Methods of computing national income
Expenditure Method: the third method of calculating national income is called the expenditure or outlay method. This method calculates the net national expenditure. The calculation of national income according to this method involves various steps. All the expenses incurred by individuals are included. Then investment and fixed capital and stocks are estimated. Expenditure on construction, machine and plants is also included. Net investment in inventories is to be accounted for. Expenditure incurred by government is also included . Expenditure incurred on education is also included and finally the value of imports is deducted.
Mixed Method: sometime one method is not sufficient to calculate the natural income, for example , in our country agriculturists do not maintain proper accounts. Therefore, for them production method is adopted. But for services people, only the income method can be used. This method comprises combination of the method of production census and income census. There are various methods, which are adopted by different countries for calculating their national incomes. It is not possible to say which method is the best for computing national income. These days developed countries are using all methods so that there is cross checking and to make sure there is no mistake.
Easy method to calculate national income