There are three methods that are used to measure national income.
1. Production or value added method
2. Income method or factor earning method
3. Expenditure method
And if these methods are done correctly, the following equation must hold
Output = Income = Expenditure
This is because the three methods are circular in nature. It begins as production, through recruitments of factors of production, generating income and going as incomes to factors of production.
Product Method: Product method measures the output of the country. It is also called inventory method. Under this method, the gross value of output from different sectors like agriculture, industry, trade and commerce, etc., is obtained for the entire economy during a year. The value obtained is actually the GNP at market prices. Care must be taken to avoid double counting.
Income Method (Factor Earning Method): This method approaches national income from the distribution side. Under this method, national income is calculated by adding up all the incomes generated in the course of producing national product. National income is calculated as domestic factor income plus net factor incomes from abroad. In short,
Y = w + r + i + π + (R – P)
w = wages, r = rent, i = interest, n = profits,
This method is adopted for estimating the contributions of the remaining sectors, viz., small enterprises, banking and insurance, commerce and transport, professions, liberal arts and domestic service, public authorities, house property and foreign sector transaction.
The Expenditure Method (Outlay method): The total expenditure incurred by the society in a particular year is added together. To calculate the expenditure of a society, it includes personal consumption expenditure, net domestic investment, government expenditure on • consumption as well as capital goods and net exports. Symbolically,
GNP = C + I + G + (X – M)
C – Private consumption expenditure
I – Private Investment Expenditure
G – Government expenditure
X – M = Net exports
