Q.Explain the various methods of calculating National Income.

National income can be estimated in three ways that must all yield the same figure: the Product (Value Added) method adds up value added at each stage of production, the Income method adds up all factor incomes, and the Expenditure method adds up all final expenditure in the economy.

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 financial year). Because every rupee of production becomes someone's income and is finally spent, output, income and expenditure are three aspects of the same flow — hence three methods of measurement.

1. Value Added (Product) Method

This method adds up the value added by every producing enterprise in the economy.

• Value added = value of output of a firm − value of intermediate goods it buys.
• Adding value added of all firms gives Gross Domestic Product at market price.
• Only final values are counted and intermediate goods are deducted, so that double counting is avoided.
• From GDP(MP), deducting depreciation and net indirect taxes and adding net factor income from abroad gives National Income (NNP at factor cost).

2. Income Method

This method adds up all the incomes earned by the factors of production for their services.

• Rent (for land), Wages and salaries (for labour), Interest (for capital) and Profit (for enterprise), plus mixed income of the self-employed.
• Sum of these gives Domestic Income (NDP at factor cost).
• Adding net factor income from abroad gives National Income.
• Transfer payments (pensions, charity, gifts) are excluded because no production corresponds to them.

3. Expenditure Method

This method adds up all final expenditure on goods and services in the economy:

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