Methods Of Calculating National Income
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.
GDP = Rent + Wage + Interest + Profit + Income from abroad
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.
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
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.
Real National Income is called _________________ | |||
| Right Option : A | |||
| View Explanation | |||
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