Q.Explain the various methods of calculating National Income.

National income can be measured in three ways that yield the same figure: the Product (Value-Added) Method adds the value added at each stage of production; the Income Method adds all factor incomes earned (rent, wages, interest, profit) plus mixed income; and the Expenditure Method adds final spending on consumption, investment, government purchases and net exports.

Meaning

National income is the total money value of all final goods and services produced by the normal residents of a country during an accounting year, usually one year. Because the same production generates equal value, income and expenditure in the economy, it can be measured at three points of the circular flow.

1. Product Method (Value-Added Method)

Under this method the economy is divided into producing sectors — primary, secondary and tertiary. The value added by each unit is found by subtracting the value of intermediate goods from the value of its output, so that double counting is avoided. Adding the value added of all units gives Gross Domestic Product at market price. Then:

• GDP at market price minus depreciation = Net Domestic Product.
• Adjusting for net factor income from abroad and net indirect taxes gives National Income (NNP at factor cost).

Care must be taken to count only final goods, to include the value of self-consumed output and imputed rent of owner-occupied houses, and to exclude purely financial transactions.

2. Income Method

Here national income is obtained by adding all the incomes earned by factors of production for their productive services:

• Rent and royalty (for land),
• Wages and salaries including bonus and benefits (for labour),
• Interest (for capital),
• Profit — dividends, undistributed profit and corporate tax (for organisation),
• plus mixed income of the self-employed.

The sum is Domestic Income (NDP at factor cost); adding net factor income from abroad gives National Income. Transfer payments like pensions, gifts and scholarships are excluded because no production is involved.

3. Expenditure Method

This method adds up all final expenditure on currently produced goods and services:

• Private final consumption expenditure (C),
• Gross domestic capital formation or investment (I),
• Government final consumption expenditure (G),
• Net exports, that is exports minus imports (X minus M). …