Production (output) method:
- The sum of monetary value of finished goods and services produced in agriculture, industries and service sector in a country is called the national income of that country.
- Thus, National income – (Production in agriculture + Production in industries + Production in service sector) × Market value
- This method of calculating national income has been developed from the definition given by Prof. Marshall.
Classification of economy in different sectors:
To obtain the national income the economy is classified into various sectors like agriculture, industries, services, mines, construction, manufacturing, trade-commerce, transportation, communication, banking, education, etc.
Types of incomes and their role while calculating national income:
(I) Incomes that are considered:
1. Selection of goods or services:
Value of only finished goods and services produced in the economy is considered i.e. value of goods and services still in the process of production are not calculated.
2. Imputed rent:
- Those who live in their own house do not need to pay rent. This benefit of rent that they get is a part of their income and is called imputed rent.
- Here we assume that if the house is given to someone on rent it can earn rental income and so that value is considered in national income.
3. Export:
Value of total export is added.
(II) Incomes that are not considered:
1. Service of housewives:
Household work done by housewives is not sold in the market. Hence, its monetary value cannot be measured and so is not considered while calculating national income.
2. Self-consumption:
- Goods produced for seif-consumption are not sold in market so their monetary value cannot be measured. Hence, such goods are not considered in national income.
- However, as an exception the food-grain produced by Indian farmers for self-consumption is considered in national income.
3. Defence (Police):
There are no markets for goods produced for defence and police services except using them in defence/police. Hence, these goods are not considered in calculation of national income.
4. Double counting:
Double counting means counting the value of the same product (or expenditure) twice i.e. more than once.
- According to production method while calculating national income, the value of only final products and not the interim products or products and services in process.
- This is incorrect and so double counting should be removed from national income accounting because it over-values national income.
There are two ways to avoid double counting. They are:
(a) To count the value of finished goods only.
(b) Value Added Method.
5. Resale:
- If a good was produced in the past its value was counted in the national product at that time. When it is resold its value is not counted. If it is counted, it will be double counting.
- For example, if a house purchased in year 2000 is resold today this resale is not considered in national product.
6. Smuggled/lllegal goods:
The value of smuggled or illegal goods is not considered in calculation.
(III) Incomes or items that are deducted:
1. Depreciation:
During the process of production the depreciation related to capital factor is deducted from the national product.
2. Indirect tax and subsidy:
- While deriving the market value of a good, the indirect taxes of the government levied on the goods are added.
- Hence, while finding out national product, the indirect taxes are deducted whereas the subsidy given by government is added.
