Methods of Measuring National Income

India's national income is estimated by combining three internationally recognised methods, each better suited to a different part of the economy, and each corresponding to one stage of the circular flow studied above.

1. Product (Output/Value Added) Method — sums the value added by every productive enterprise, sector by sector (agriculture, mining, manufacturing, trade, services, and so on), after netting out the cost of intermediate inputs:

This method works best where reliable output records exist — agriculture and organised manufacturing.

2. Income Method — sums the incomes actually earned by the owners of the factors of production employed in producing that output:

Adding Net Factor Income from Abroad converts this purely domestic total into National Income (NNP at Factor Cost). This method suits the organised sector, where wage records and company accounts are available.

3. Expenditure Method — sums all final expenditure on domestically produced goods and services, matching the four-sector circular flow directly:

where $C$ is private final consumption expenditure, $I$ is gross domestic capital formation (investment), $G$ is government final consumption expenditure, and $(X - M)$ is net exports. This is the method relied on most for the services (tertiary) sector, where output and income are hard to record directly from millions of small providers, but spending on transport, trade, banking and communication can be tracked through expenditure surveys.

Precautions against double counting. Whichever method is used, the same total must not be counted more than once:

• Count only the value of final goods, or equivalently sum only the value added at each stage — never the gross sale value of intermediate goods that are re-sold as inputs into another product.
• Exclude the sale of second-hand goods — a used car changing hands generates no new production this year (only the dealer's own service commission, if any, counts).
• Exclude purely financial transactions such as buying/selling of existing shares and bonds — these transfer ownership of assets without creating any new output. …