Economics

3 Important Methods for Measuring National Income

Income and Expenditure method for measuring national income

The four factors of production – land, labour, capital and organization in a country produce a certain volume of goods and services every year. The sum total of these goods and services is called national income. We must distinguish between gross national income and net national income.

Gross national income is the total value of goods and services, produced in the country- imports plus exports. Net national income is the gross national income minus depreciation charges. According to Marshall, the labour and capital of a country, acting upon its natural resources, produce annually a certain net aggregate of commodities, material including services of all kinds. The money value of these commodities is called national income.

Measurement of National Income:

There are three methods for measuring National Income. They are: Product Method, Income Method and Expenditure Method.

  1. Product Method: This method is also called output method. In this method, national income is calculated by finding the net values of all goods and services produced in a country during a year. Production is carried in different sectors like agriculture, industry, mining, transport etc. We must calculate the net values of all good and services produced from each sector. While estimating national income by this method, the values of finished income goods have to be taken. The values of intermediate goods should not be taken into account.

The total of the net value of the goods and services produced in all the industries and in all the sectors .of economy plus the net income obtained from foreign countries will give us the gross national product. After deducting the depreciation charges from the gross national product, we get the net national income.

2. Income Method: In this method, National, income is measured by totaling the income received by individuals, institutions and Governments. Generally in this method we add rent, wages; interest and profit received by all people in the country. The total national income is called factors payment total. While product method calculates National Income from the production point of view, income method  calculates National Income from the distribution point of view. In this method some precautions must be taken.

Precautions in measuring National Income:

  1. Only net income should be taken into account but not gross income.
  2. The Income from the sale of assets should not be taken into account.
  3. Transfer earnings, like the income of beggars, petitioners, unemployment dolls etc., should not be added to National Income.
  4. The income of the company and the income of the share holders should not be calculated separately.
  5. The undistributed profits must be added to National income as they represent income earned during the period.
  6. The net income of the self employed persons must be added.

To determine the income of the persons, we can make use of the tax returns, Government reports, and the annual reports of various companies. This method helps to study the distribution pattern of wealth in the society. Unless people are honest, this method cannot become an effective one.

3. Expenditure Method : Under this method, the National Income is measured by adding up all the expenditure on goods and services during a year. Income is spent either on consumption goods or investment goods. So, we can know the national income by adding up all the consumption expenditure and investment expenditure made by the individuals, business firms and Governments While calculating National Income through this method, the savings of the people will be added to the national income. Thus, national income can be estimated by adopting any one of the
above methods. But the best way is to employ all these three methods to check tin the correctness of our result.

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