Methods of Measuring National Income

Written By Fathimath Sama on Saturday, 22 June 2013 | 20:51

In preparing the national income estimate it is necessary to add the values of all final goods and services produced and exchanged during a year. Thus what ever is produced is either used for consumption or saving. There are three methods of estimating national income. They are: 
  • The census of products method 
  • The census of income method 
  • The expenditure method 

1. The Census of Products Method: 

This is also called inventory or output method. Under this method, the value of aggregate production of final goods and services in an economy in a year is considered. The economy is divided into different sectors such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and services etc. Then the gross product is found out by adding the net values of all production that has taken place in these sectors during a year. The aggregate of all these is called the gross national product at market price. While calculating the gross national product under this method, care must be taken to avoid double counting.

The computation of national income of a country through output method has been illustrated in the following table.

2. The Census of Income Method: 

This method approaches the national income from the distribution side. The incomes accruing to all the factors of production during the process of production are aggregated together. This is called national income at factor cost. National income is calculated by adding the following: 
  • 1. Wages and salaries 
  • 2. Social security 
  • 3. Earning of self-employed or professional income 
  • 4. Dividends 
  • 5. Undistributed profits 
  • 6. Interest 
  • 7. Rent 
  • 8. Profits of public sector enterprises and 
  • 9. Subsidies and transfer payments have to be deducted. All unpaid services are to be excluded. Financial investments in the form of equity shares, sales of old property etc. are to be excluded. Direct tax revenue to the government should be subtracted from the total income. Government subsidies should be deducted. In India the national income committee is using this method in calculating national income. 

3. The Expenditure Method: 

Expenditure method arrives at national income by adding up, all expenditure made on goods and services during a year. Income can be spent on consumer goods or capital goods. Again, expenditure can be made by private individuals and households or by government and business enterprises. Further, people of foreign countries spend on the goods and services which a country exports to them. Similarly people of a country spend on imports of goods and services from other countries. We add up the following types of expenditure by households, government and by productive enterprises to obtain national income. 
  • Expenditure on consumer goods and services by individuals and households. This is called final private consumption expenditure and is denoted by ’C’. 
  • Government expenditure on goods and services to satisfy collective wants. This is called government’s final consumption expenditure and is denoted ‘G’. 
  • The expenditure by productive enterprises on capital goods and inventories or stocks. This is called gross domestic capital formation, which, is denoted by ‘I'. Gross domestic capital formation is divided into two parts. 
                    a) Gross fixed capital formation 
                    b) Addition to the stocks or inventories of goods 
  • The expenditure made by foreigners on goods and services of a country exported to other countries, which are called exports and are denoted by ‘x’. We deduct from exports ‘x’ the expenditure by people, enterprises and government of a country on imports (M) of goods and services from other countries. That is, we have to estimate net exports (that is exports- imports) or (x-m).
Thus we add up the above four types C+G+I+(x-m) to get final expenditure on gross domestic product. On deducting consumption of fixed capital, we get net domestic product.

Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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