Q.Define National Income and explain the various methods of calculating National Income.

National income is the total value of final goods and services (net national product at factor cost) produced by a country's normal residents in a year. It is measured by three equivalent methods: the Value Added (product) method, the Income method, and the Expenditure method, each with its own precautions to avoid double counting.

Definition

National income is the net money value of all final goods and services produced by the normal residents of a country during an accounting year, counted at factor cost. In symbols it is the Net National Product at Factor Cost (NNP at FC). It measures the flow of income earned by the factors of production owned by residents.

Methods of calculating national income

1. Value Added (Product) Method:
   • Add up the value added by every producing unit in all sectors (primary, secondary, tertiary).
   • Value added = value of output minus value of intermediate consumption.
   • The sum gives Gross Domestic Product at market price; subtract depreciation and net indirect taxes and add net factor income from abroad to reach NNP at FC (national income).
   • Precautions: count only value added (not the full value of output, to avoid double counting); include self-consumed output; exclude sale of second-hand goods.
2. Income Method:
   • Add up all factor incomes generated within the domestic territory: compensation of employees (wages and salaries), rent, interest, and profit, plus mixed income of the self-employed.
   • This gives Net Domestic Product at FC; add net factor income from abroad to get national income (NNP at FC).
   • Precautions: exclude transfer payments (pensions, gifts), illegal incomes, and income from sale of second-hand goods; include imputed rent of owner-occupied houses.
3. Expenditure Method:
   • Add up all final expenditure in the economy: private final consumption expenditure (C), government final consumption expenditure (G), gross domestic capital formation / investment (I), and net exports (exports minus imports, X minus M). …