Answer the following question in detail (any two): Explain any two methods of measuring national income.

Answer:

National income is the money value of all final goods and services produced in a country during a financial year, plus net factor income from abroad. It can be measured by the output (product) method, the income method and the expenditure method. Two of them are explained below.

1. Output (product / value added) method

Under this method national income is measured by adding the money value of all final goods and services produced in the economy during a year. The economy is divided into the primary sector (agriculture, forestry, fishing, mining), the secondary sector (manufacturing, construction, electricity) and the tertiary sector (trade, transport, banking, services). The value of output of each sector is calculated, or the value added at each stage is summed (value added = value of output − value of intermediate consumption).

\(\text{GDP} = \sum \text{Value of final goods and services}\)
\(\text{NNP} = \text{GDP} - \text{Depreciation} + \text{Net factor income from abroad}\)

Precautions: (a) count only final goods to avoid double counting; (b) exclude second-hand goods and intermediate goods; (c) include the value of production for self-consumption; (d) exclude transfer payments.

2. Income method

Under this method national income is measured by adding all factor incomes received by the factors of production for their services in producing goods and services during the year: rent (land), wages and salaries (labour), interest (capital) and profit (organisation), plus mixed income of the self-employed.

\(\text{NI} = \text{Rent} + \text{Wages} + \text{Interest} + \text{Profit} + \text{Mixed income} + \text{Net factor income from abroad}\)

Precautions: (a) transfer payments such as pensions, scholarships and unemployment allowance are excluded; (b) income from sale of second-hand goods and shares (capital gains) is excluded; (c) illegal income is excluded; (d) imputed rent of owner-occupied houses is included.

3. Expenditure method (alternative)

National income is measured by adding the total final expenditure in the economy: private consumption expenditure (C), gross domestic investment (I), government expenditure (G) and net exports (X − M).

\(\text{GNP} = C + I + G + (X - M)\)

Expenditure on intermediate goods, second-hand goods and transfer payments is excluded.

Conclusion: Since production generates income and income is spent, all three methods should give the same result. In India a combination of the output and income methods is used.