Question

Which method should a nation adopt to calculate national income?

Answer 1

There are three methods of calculating national income. They are

1. Production method
2. Income method and
3. Expenditure method.

• All the methods are equally reliable and so one can adopt any of these three methods for calculating national income.
• If true data is available, national income will be the same irrespective of the method of calculation used.
• However, every method has one or the other limitation. Hence, it is said that these methods are mutually complementary to each other and can be used to cross-verify the figures obtained from any method.
• For example, if national income is calculated in form of production its truthfulness can be tested in terms of expenditure.
• As per the practice of economics, the method of production is suitable for developing countries like India whereas for countries like America and Russia, the methods of income and expenditure are suitable.
• So we can say that all the methods have their own pros and cons and hence the decision of using the method of calculation of nation lies on the country.