National Income is macro economic concept. National Income means money value of goods and services produced in the country in a year.
There are three methods to measure national income.
(1) The Output Method,
(2) The Income Method,
(3) The Expenditure Method.
(A) The Income Method : This method is also known as factor cost method. According to this method national income is the sum of income received by all factors of production in a year. So national income is the income received by all the citizens of the country in a year. In income method national income studied from the distribution side. According to income method national income or GNP is NI = R + W + I + P + MI + (X – M)
- Rent (R) : Rent and Royalty is usually treated as the payment for the land, building, machines that are rented.
- Wages (W) : It includes wages and salaries earned by labour as well as it includes commission, bonus, social security payments, fringe benefits, etc.
- Interest (I) : Interest is the payment for using the services of capital. It includes interest paid by banks, insurance companies etc.
- Profit (P) : It includes the profit of private and public sector companies.
- Mixed Income (MI) : It is the income which is earned by self-employed. They earn income through various sources like wages for effort put, rent on own property, interest on own capital, etc.
- Net Exports (X – M) : It is the difference between export and imports.
Precautions :
- Transfer payment : It should not be included in national income. E.g. pension, gifts, unemployment allowances, lottery prize, etc.
- Unpaid services : It should not be included in national income. E.g. services of housewife, teacher teaching her own child, etc.
- Second hand goods : The income from sale of second hand goods should not be included.
- Financial asset : The income from sale of shares and bonds should not be included in national income.
- Tax revenue : The revenue of government through taxes should not be included in national income.
- Undistributed profits of companies, income from government property and profits from public enterprise should be included.
- Imputed value of production kept for self consumption and rental value of owner occupied houses should be included in national income.
(B) Expenditure Method : This method also known as outlay method. NI = C + I + G + (X – M) + (R – P) National Income can also be calculated by adding up the expenditure incurred on purchase of final goods and services. We can get National Income by summing up all consumption expenditure, investment expenditure made by all individuals, firms as well as the government of a country during a year.
- Consumption Expenditure (C) : It includes all expenditure incurred on goods and services by households during the year. It includes expenditure mostly on durable and non-durable goods, which are consumed by the consumers. E.g. food, medical care, clothing, car, computer and services, etc.
- Investment Expenditure (I) : It refers to the investment made by private businessman on capital goods like machinery, plants, factories, warehouses, etc.
- Government Expenditure on goods and services (G) : Government expenditure refers to expenditure on consumption and investment.
- Consumption expenditure : It refers to expenditure incurred on various administrative services like law and order, defence education, generation and distribution of electricity.
- Investment expenditure : It refers to expenditure incurred by government on construction of roads, railways, dams, canals, etc.
- Net Exports (X – M): It refers to difference between exports and imports of the country. If the exports are more than imports then net exports will be positive, it is called Trade Surplus and if imports are greater than exports, the net exports will be negative, it is called as Trade Deficit.
- Net Receipts (R-P) : It is the difference between expenditure incurred by foreigners in the country (R) and expenditure incurred abroad by Nationals (P). Net Receipts can also be Positive or Negative.
Net National Expenditure = NNE = C + I + G + (X – M) + (R – P) – Depreciation. NNPFC or NI = C + I + G + (X -M) + (R -P) “Depreciation “ Indirect Tax + Subsidies.
Precautions :
The following precautions should be taken while estimating National Income.
- To avoid double counting take the expenditure incurred only on final goods and services.
- Government expenditure on transfer payments to be excluded like unemployment allowances, old age pension etc.
- Expenditure on second hand goods like furniture, house, land and financial assets { like shares, bonds, etc. should be excluded.
- Exclude expenditure incurred on purchase of financial assets such as shares, bonds, etc.
- Deduct indirect tax and add subsidies. Out of these methods, output method and income method are extensively used. Expenditure method is rarely used because of its practical difficulties. In India, the Central Statistical Organisation (CSO) adopts a combination of output method and income method to estimate N.I. of India.
Product Method or Output Method: This method is also called as Inventory Method. According to this method economy is divided into various sectors like agriculture, mining, manufacturing, small enterprises, commerce, transport, communication, etc.
National income by this method can be calculated by either valuing all final goods and services produced during a year at their market price or by adding up all values at each higher stage of production, until these products are turned into final products.
In output method there are two approaches to measure national income.
(1) Final Goods Approach I Final Product Approach : According to this approach, value of all final goods and services produced in primary, secondary and tertiary sector are included and the value of all intermediate transactions are ignored.
2. Value Added Approach I Value Added Method: To avoid double-counting, the value added approach is used to estimate the National Income. According to this method, it is necessary to obtain the total of value-added at each stage in the manufacture of a commodity to arrive at Gross National Product.
The value-added method can be explained by means of a simple example.
(a) In the above example, value of groundnut with shell is 50, after removing shells value of groundnut is 80, after crushing groundnut the value is 120 and when oil is packed in the packets its value is 150.
To avoid double-counting either the value of final output or the value – added should be taken in estimation of National Income.
The output method is widely used in the underdeveloped countries. In India, this method is applied in agriculture, mining and manufacturing sector.
Precautions:
- Avoid Double Counting: The value of only final goods and services must be considered and not the value of raw – materials or intermediary goods, etc.
- Self Consumption Goods: Goods used for self-consumption by farmers should be included in National Income.
- Price Level Changes to be considered: The values of national output must be expressed in terms of prices in some base year to know the national output in real terms i.e. N.I. at constant price.
- Net Income from Abroad: Care should be taken to include net income from abroad in National Income.
- Depreciation: Depreciation of capital assets should be deducted from the value of gross investment during the year.
- Indirect Taxes and Subsidies: To get National Income, deduct the indirect tax from the market price and add subsidies.
- Second-Hand Goods: Sale and purchase of second-hand goods should be ignored as it is not a part of current production.
