What is Meant by National Income?
National income refers to the monetary value over a period of time of the output flow of goods and services produced in an economy.
The Uses of National Income Statistics
Measuring the level and rate of growth of national income (Y) is essential to keep track of:
The rate of economic growth
Changes to living standards
Changes to the distribution of income b/w groups
Gross Domestic Product
The total value of output in an economy is the Gross Domestic Product (GDP) and is used to measure economic activity changes. GDP encompasses the production of foreign-owned enterprises located in a country following the foreign direct investment.
There are three different ways to calculate GDP that should all add up to the same amount: The national output is equal to national expenditure (Aggregate demand) which in turn is equal to national income.
The equation for GDP using this approach is
GDP = C(Household spending) + I(Capital investment spending) + G(Government spending) + (X(Exports of Goods and Services)-M(Imports of Goods and Services)
The three different ways to measure GDP are - Product Method, Income Method, and Expenditure Method.
These three calculating GDP methods yield the same result because National Product = National Income = National Expenditure.
The Product Method:
In this method, all goods and services produced during the year in various industries are added up. This is also known as value-added to GDP or GDP at the sector of origin's cost factor. India includes the following items: agriculture and allied services; mining; development, construction, the supply of electricity, gas, and water, transport, communication, and trade; banking and industrial real estate and property ownership of residential and commercial services and public administration and defence and other services (or government services). It is, in other words, the amount of the added gross value.
The Income Method:
In a nation that produces GDP during a year, people earn income from their jobs. Thus the sum of all factor incomes is GDP by revenue method: wages and salaries (employee compensation) + rent + interest + benefit.
Expenditure Method:
This approach focuses on products and services generated during one year within the region.
GDP is subtracted from the portion of consumption, investment, and government spending expended on imports. Likewise, all manufactured components, such as raw materials used in the manufacture of products for sale, are also exempt.
Thus GDP by expenditure method at market prices is net export, which can be positive or negative.
GDP at Factor Cost:
GDP is the amount of net value added by all producers within the country at the cost factor. Since the net value added is allocated as revenue to the owners of production factors, the sum of domestic factor incomes and fixed capital consumption is GDP (or depreciation).
Thus,
GDP at Factor Cost is equal to the sum of Net value added and Depreciation.
GDP at factor cost includes -
Compensation of employees, i.e., wages, salaries, etc.
Operational surplus, which is both incorporated and unincorporated companies' business profit.
Mixed-Income of Self- employed.
Conceptually, GDP at the cost factor and GDP at the market price must be equivalent since the cost factor (payments to factors) of the products produced must be equal to the final value at market prices of the goods and services. The retail value of products and services, however, varies from the earnings of the output factors.
Net Domestic Product (NDP):
The NDP is the value of the economy's net production throughout the year. During the manufacturing process, some of the country's capital equipment wears out or becomes redundant each year. A certain percentage of the gross expenditure removed from GDP is the amount of this capital consumption.
Net Domestic Product = GDP at the expense of Factor - Depreciation
Nominal and Real GDP:
It is referred to as GDP at current prices or nominal GDP when GDP is calculated based on the current price. On the other hand, if GDP is measured in a given year based on fixed costs, it is referred to as GDP at constant prices, or actual GDP.
Nominal GDP is the value of the goods and services produced in a year, calculated at the current market) prices in terms of rupees (money).
Three Important Methods for Measuring National Income
There are three techniques to compute national income:
Income Method
Product/ Value Added Method
Expenditure Method
Income Method
National income is calculated using this method as a flow of factor incomes. Labor, capital, land, and entrepreneurship are the four main components of production. Labour is compensated with wages and salaries, money is compensated with interest, the land is compensated with rent, and entrepreneurship is compensated with profit.
Furthermore, certain self-employed individuals, such as doctors, lawyers, and accountants, use their own labour and capital. Their earnings are classified as mixed-income. NDP at factor costs is the total of all of these factor incomes.
National Income is calculated as a flow of income in this case.
NI can be calculated as follows:
Employee compensation + Operating surplus (w + R + P + I) + Net income + Net factor income from overseas = Net national income.
Where,
Wage stands for wage and salaries
R stands for rental income.
P stands for profit.
I stand for mixed-income.
Product/ Value Added Method
National income is calculated using this method as a flow of goods and services. During a year, we determine the monetary value of all final goods and services generated in an economy. The term "final goods" refers to goods that are consumed immediately rather than being employed in a subsequent manufacturing process.
Intermediate goods are goods that are used in the manufacturing process. Because the value of intermediate products is already included in the value of final goods, we do not count the value of intermediate goods in national income; otherwise, the value of goods would be double-counted.
To avoid duplicate counting, we can use the value-addition approach, which calculates value-addition (i.e., the value of the end good plus the value of the intermediate good) at each stage of production and then adds them together to get GDP.
The sum-total is the GDP at market prices since the money value is measured at market prices. The methods outlined before can be used to convert GDP at market price.
The flow of goods and services is used to calculate national income.
NI can be calculated as follows:
G.N.P. - COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES = NATIONAL INCOME
Expenditure Method
National income is calculated using this method as a flow of expenditure. The gross domestic product (GDP) is the total of all private consumption expenditures. Government consumption expenditure, gross capital formation (public and private), and net exports are all factors to consider (Export-Import).
As said above, the flow of expenditure is used to calculate national income.
The Expenditure technique can be used to calculate NI as follows:
NationalIncome+NationalProduct+NationalExpenditure=National Income+National Product+National Expenditure=National Expenditure.
So, the ideas of National Income were thoroughly discussed above. Students who are preparing for various exams such as UPSC and SSC.
FAQs on National Income Measurement Methods
1. Explain Expenditure Method for Measuring National Income?
National company can be measured by 3 different methods -
(i) Product Method (ii) Income Method and (iii) Expenditure Method.
The total production value produced in a given period is the gross domestic product (GDP). This approach calculates the economy's gross domestic spending. It is made up of two elements, viz—expenditure on consumption and spending on investment. Consumption spending includes spending on consumer goods and services by the household sector and spending on corporate and public authorities' consumption. Investment spending applies to fixed capital investment, such as plants and equipment, offices, etc.
To sum up, national income is calculated in this system as a flow of expenditure. GDP is the sum-total of spending on private consumption. Spending on government consumption, gross capital (government and private), and net exports (Export-Import).
2. Why Should the Final Aggregate Expenditure of an Economy be Equal to the Aggregate Factor Payments? Explain. Give Three Differences Between National Income at Current Price Vs. National Income at Constant price?
National Income = National Product = National Expenditure. It will each give the same result. The only distinction is that for commodity methods, the NI is estimated at the level of manufacturing or production, with the NI method being measured at the level of delivery, and with the NI expenditure method being measured at the level of disposal.
Parameters | National income at Current price | National income at Constant price |
Causes of change | National income at current price is affected by both price and quantity changes. | National income at Constant price is affected by change in the quantity only |
Comparison | Not appropriate tool for national income comparison of different years | It is commonly used to measure national incomes for different years. |
Index of Economic Growth | Not a good metric for assessing a country's economic growth | It is a better instrument for measuring a country's economic growth. |
3. What is the definition of national income?
The total worth of goods and services generated by a country during its fiscal year is referred to as its national income. It is thus the result of all economic activity that takes place in a country over the course of a year. It is valued in monetary terms. In a nutshell, a country's national income is the entire amount of money it earns over the course of a year through various economic activities. It is also useful in determining the country's progress.
Wages, interest, rent, and profit received by components of production such as labour, capital, land, and entrepreneurship in a country are included.
4. What exactly is the Income Method?
National income is calculated using this method as a flow of factor incomes. Labor, capital, land, and entrepreneurship are the four main components of production. Labour is compensated with wages and salaries, money is compensated with interest, the land is compensated with rent, and entrepreneurship is compensated with profit.
Furthermore, certain self-employed individuals, such as doctors, lawyers, and accountants, use their own labour and capital. Their earnings are classified as mixed-income. NDP at factor costs is the total of all of these factor incomes.
5. What Is Gross Domestic Product (GDP) and What Does It Mean?
GDP measures the total monetary or market value of all finished goods and services produced within a country's borders over a given time period. Because it is a broad measure of all domestic production, it serves as a comprehensive assessment of a country's economic health.
GDP is normally estimated on an annual basis, although it is also calculated on a quarterly basis.
6. What is GDP Per Capita?
The Gross Domestic Product (GDP) per capita is a measure of the GDP per person in a country's population. It means that the amount of output or revenue per person in a given economy can be used to estimate average productivity or living standards.
GDP Per Capita, in its most basic form, indicates how much economic production value can be assigned to each individual citizen. Since GDP market value per person may also be used as a measure of prosperity, this also translates to a measure of overall national wealth.
7. Where can I find notes on Methods of measuring national income?
Vedantu provides notes and questions on methods of measurement of national income. The content is prepared in a style that students can comprehend and remember by educators who are experts in their fields. It includes topics such as - GDP, GDP per capita, national income, expenditure, etc. Vedantu also offers study materials and a variety of competitive exams for students in grades 1 through 12. The contents include notes, important topics and questions, revision notes, and other things. On Vedantu, you may access all of these resources for free. To use all of these resources, students must first register on the Vedantu Website You can also register through Vedantu's mobile app.
