Methods of Measuring National Income

Because output, income and expenditure are equal for the economy as a whole, national income can be estimated by three methods. India uses a combination of all three across different sectors.

1. Product (Value-Added) Method. This sums the value added by every producing enterprise, where value added equals the value of output minus the value of intermediate goods used up. Summing value added — rather than the total value of every firm's output — is what avoids double counting, since one firm's output is another firm's input. Adding the value added of all sectors gives GDP at market prices; adjusting for NFIA, depreciation and net indirect taxes yields national income.
2. Income Method. This adds up all the factor incomes generated in production: compensation of employees (wages and salaries), rent (and royalty), interest, and profit (including dividends, undistributed profits and corporate tax). Their sum is domestic income at factor cost; adding NFIA gives national income. Transfer payments (pensions, scholarships, gifts) are excluded because they are not payments for any current production.
3. Expenditure Method. This adds up all final expenditure on the economy's output:

   $GDP_{MP} = C + I + G + (X - M)$

   where $C$ is private final consumption expenditure, $I$ is gross investment (including changes in stocks), $G$ is government final consumption expenditure, and $(X - M)$ is net exports (exports minus imports). Only final expenditure is counted, and intermediate purchases are excluded, again to prevent double counting. …