National Income - Measurement of National Income

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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 Metod.

These three calculating GDP methods yield the same result because National Product = National Income = National Expenditure.

1. 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 insurance; 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.

2. 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.

3. 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.

4. 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 -

(i) Compensation of employees, i.e., wages, salaries, etc.

(ii) Operational surplus, which is both incorporated and unincorporated companies' business profit. 

(iii) 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.

5. 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

6. 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). 

FAQ (Frequently Asked Questions)

1. Explain Expenditure Method for Measuring National Income?

Ans - 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.

Ans:

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.