Methods For Calculating National Income

Methods of Measuring National Income:

There are four methods of measuring national income. Which method is to be used depends on the availability of data in a country and the purpose in hand.

1. Production Method

This method is based on the total production of a country during a year. According to this method, the total value of final goods and services produced in a country during a year is calculated at market prices. Only the final goods and services are included and the intermediary goods and services are left out. First of all production units are classified into primary, secondary and tertiary sectors then we identify the various units that come under these sectors. We estimate the goods and services produced in each of these sectors. The sum total of products produced in these three sectors is the total output of the nation. The next step is to find out the value of these products in terms of money. The money sent by Indian citizens working abroad is also added to this. Now we get the gross national income.

GDP = Money value of final goods and services + Income from abroad

2. Income Method

According to this method, the net income payments received by all citizens of a country in a particular year are added up, i.e. net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits are all added together but incomes received in the form of transfer payments are not included in it.

Factors of production together produce output and income. 1he income received by the factors of production during year can be obtained by adding rent to land, wages to labor. interest to capital and profit to organizations. This will be equal to the income of the nation. In other words, total income is equal to the reward given to various factors of production.

By adding the money sent by the Indian citizens from abroad to the income of the various factors of production, we get the gross national income.

GDP = Rent + Wage + Interest + Profit + Income from abroad

This method will help us to know the contributions made by different agents like landlords, laborers, capitalists and organizers to national income

3. Expenditure Method

According to this method, the total expenditure incurred by the society in a particular year is a together and includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and net foreign investment. This concept is based on the assumption that national income equals national expenditure.

National income can also be calculated by adding up the expenditure incurred for goods and services. Government as well as private individuals spend money for consumption and production purposes. The sum total of expenditure incurred in a country during a year will be equal to national income.

4. Value Added Method:

Another method of measuring national income is the value added by industries. The difference between the value of material outputs and inputs at each stage of production is the value added.

GDP = Individual Expenditure + Government Expenditure

This method will help us to identify the expenditure incurred by different agents.

Any one of the above methods can be used for calculating national income.

Production method = Income method = Expenditure method

We have already noted that a part of the capital gets consumed during the year due to wear and tear. This wear and tear is called depreciation. Naturally, depreciation does not become part of anybody's income. If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net National Product (NNP). Thus,

NNP = GNP - Depreciation

It is to be noted that all these variables are evaluated at market prices. Through the expression given above, we get the value of NNP evaluated at market prices. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the movement. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidized). So we need to add subsidies to the NNP evaluated at market prices.

The measure that we obtain by doing so is called Net National Product at factor cost or National Income.

Thus, NNP at factor cost

= National Income (NI)

= NNP at market prices - (Indirect taxes - Subsidies)

= NNP at market prices - Net indirect taxes 

where Net indirect taxes = Indirect taxes - Subsidies

Personal Income (P) = NI - Undistributed profits - Net interest payments made by households - Corporate tax + Transfer payments to the households from the government and firms.

However, even PI is not the income over which the households have complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (for income tax), and Non - tax Payments (such as fines) from Pl, we obtain what is known as the Personal Disposable Income. Thus

Personal Disposable Income (PDI) = PI - Personal tax payments - Non-tax payments.

Personal Disposable Income is the part of the aggregate income which belongs to the households. They may decided to consume a part of it, and save the rest.