Chapter-4: Methods of Measuring National Income
National Income can be calculated from three different Aspects:
- As the sum total of value added by all producing units in the economy.
- As the sum total of factor incomes generated in the economy during the period of a financial year.
- As the sum total of expenditure on the final goods and services produced in an economy in a financial year.
Three methods of measuring National Income:
- Value added method or product method
- Income method
- Expenditure method
National Income estimated on the basis of all the three methods, amounts to be the same. Now, it can safely be said that National Income, National Product = National Income = National Expenditure. This is known as triple identity.
The first common step of all the methods given in the measurement of National Income, is to categorise the producing enterprises into primary, secondary and tertiary sectors:
- Primary sector: It includes production of goods by exploiting natural resources, i.e. agriculture, forestry, logging, fishing, mining and quarrying, etc.
- Secondary sector: It includes all those units which produce commodities by transforming one type of commodity into other type of commodity, i.e. manufacturing, constructions, electricity, gas and water supply, etc.
- Tertiary sector: It is that sector in which entrepreneurs provide services, it includes units like educational, medical, public administration, banking, insurance and other services.
Value Added Method or Product Method
In this method, the money value of goods and services produced in an economy is computed. There are two ways to estimate National Income according to this method:
- Final product method: In this method, the market value of final goods and services produced in a country are included. The market value is computed by multiplying all the final goods and services produced in a country with their respective market price. This method is not used much due to the problem of double counting.
- Value added method: Under this method, from the value of output, the value of
intermediate consumption is deducted to find the value added to product.
Problem of Double Counting
Double counting means counting of the value of the same product (or expenditure) more than once.
According to output method (an alternative method to value added method) of calculating national income, value of only final goods and services produced by all the production units of a country during a year should be counted. In other words, value of intermediate goods which enter into final goods (e.g., paper used in printing of books, raw cotton used in garments, wheat used in making bread, etc.) should not be taken into account.
But in actual practice, while taking value of final goods, value of intermediate goods also gets included because every producer treats the commodity he sells as final product irrespective of whether it is used as intermediate or final good. For instance, while taking value of final goods like cycles, the value of tyres, tubes, frames, bells, etc. (intermediate goods) used in manufacturing these cycles also gets included inadvertently
In this way certain items are counted more than once resulting in over-estimation of national product to the extent of the value of intermediate goods included. This is called the problem of double counting which means counting value of the same commodity more than once.
From both the above ways, we get GDPMP. To this, NFIA is added and depreciation and NIT are deducted to get the National Income of the country.
Estimation of NNPFC
To calculate NNPFC, we would consider the following:
Step-1 : Estimation value of output.
Estimation of Value of goods and services produced by a firm during an accounting year is called value of output.
- If the entire output is not sold within the year.
Value of Output = Sales + Change in Stock,
- If output is entirely sold, then,
Value of output = Sales.
Step-2 : Estimation of change in stock
The difference between the closing stock and opening stock of an accounting year is termed as change in stock.
Change in stock = Closing Stock – Opening Stock
Step -3 : Estimation of Value Added
Value added by the units is the excess of sale price over the cost of goods. In other words, it refers to the addition of value to a thing.
Value Added(GVAmp) = Value of Output – Intermediate Consumption
Estimation of Gross Value Added at Market Price (GVAMP)
Estimation of National Income by value added method
- Identify all the production units, i.e. primary, secondary and tertiary
- Calculate gross value added of each producing units by deducting intermediate consumption expenditure from value of output.
- Add gross value added of each production unit to get
GVAMP = GDPMP ∑GVA = VAP + VAs + VAT
VAP = Value added of primary sector
VAs = Value added of secondary sector
VAT = Value added of tertiary sector