3 Important Methods of Calculating National Income (NNPfc)

The three important methods of calculating national income are as follows:- Product Method or Value Added Method Income Method Expenditure Method

The three important methods of calculating national income are as follows:-
  1. Product Method or Value Added Method
  2. Income Method 
  3. Expenditure Method
(1). Product Method or Value Added Method:-

Product Method or Value Added Method is that method, which measures national income in terms of value addition by each producing enterprises in the economy during the accounting year.
What is Value Added? Value added is the difference between the value of output of an enterprise and the value of its intermediate consumption.


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Value Added or Value Addition = Value of Output - Intermediate Consumption 
What is a value of output? It refers to the market value of goods and services produced by a firm during an accounting year. If the entire output of the year is sold during the year, value of output = Sales
If some output remains unsold, it is added to the firm's inventory stock. It is expressed as changed in stock during the year. In such a situation, the value of output is measured as the sum total of 'sales during the year' and 'change in stock during the year'.

Value of Output = Sales + Change in Stock, if some output remains unsold during the year.

What is Intermediate Consumption? It refers to the value of non-factor inputs (all inputs other than factor inputs of land, labor, capital and capital).  Primarily it includes the value of raw materials used in the process of production.

What is Change in Stock? It is measured as the difference between closing stock and opening stock in an accounting year.


Change in Stock = Closing Stock - Opening Stock

Measurement of National Income using Value Added Method/ Product Method.

(+) Gross Value Added by all the producing enterprises within the domestic territory of the country (Primary sector + Secondary sector + Tertiary sector).
=  Gross Domestic Product at market price (GDPmp)
(-) Depreciation
=   Net Domestic Product at market price (NDPmp)
(-) Net Indirect Taxes
=   Net Domestic Product at factor cost (NDPfc)
(+) Net Factor Income from Abroad
=   National Income (NNPfc)

(2). Income Method:-

It is also called Distributed Share Method or Factor Payment Method. According to this method, national income is measured in terms of factor payment (wages. rent, interest and profit) to the owners of factors of production during an accounting year. We know, households are the owner of factors of production. However, in the estimation of national income, only those household are considered who are normal residents of the country. National income is estimated as the sum total of the factor income earned by the normal residents of the country during an accounting year. Some total of factor income generated within the domestic territory of a country is called domestic income. Net factor income from abroad is added to domestic to final national income. 

Factor Income and its Classification: A factor income refers to income earned by a person as a reward for rendering his factor service. It may be in the form of wage/salary for his labor, rent for his land, interest for his capital or profit for his entrepreneurship. It must be noted that factor incomes are only 'earned' incomes. It does not include any income which is not earned or for which a factoring service has not been rendered. To illustrate, old age pension received by the senior citizens is not their earned income. It is just a help by the government without anything in return. Such receipts or payments are called transfer receipts or transfer payments. These are not included in the estimation of national income. 
Classification of Factor incomes are as follows:-
  1. Compensation of Employees: Wages or Salaries in cash, Payment in kind, Employer's contribution to a social security scheme, Pension on retirement.
  2. Operating Surplus: It refers to income from property and entrepreneurship. It includes Rent, Interest, Profit, Dividends, Corporate profit tax, Undistributed profit. 
  3. Mixed Income ( Income of a self-employed person using his own land, labor, capital, and entrepreneurship).
Measurement of National Income using Income Method.

(+) Compensation of Employees
(+) Operating Surplus
(+) Mixed Income of a Self-Employed 
=   Net Domestic Income
(+) Net Factor Income from Abroad
=   National Income (NNPfc)

(3). Expenditure Method:- 

According to this method, national income is measured in terms of expenditure on the purchase of final goods and services produced in the economy during an accounting year. Since final expenditure comprises C (consumption) and I (Investment), it is also called Consumption and Investment Method or Income Disposable Method. Estimation of expenditure on the final goods produced during the year (within the domestic territory of the country) is equal to the market value of the GDP. called GDPmp. It is adjusted to find national income. 

Classification of Final Expenditure:

Final expenditure is broadly classified into four categories; 
  1. Private Final Consumption Expenditure (C): It refers to expenditure on final goods and services by the individuals, households and non-profit private institutions serving society. It includes consumer services, consumer nondurable goods that do not repeatedly used like butter or milk, consumer durable goods which are repeatedly used for several years like furniture and washing machine. 
  2. Government Final Consumption Expenditure (G): It refers to expenditure on final goods and services by the government, like expenditure on the purchase of goods for consumption by the defense personnel. 
  3. Investment Expenditure (I): It refers to expenditure on purchase of the final goods by the producers. These goods are to be further used in the process of production. Example: - Expenditure by the farmers on the purchase of tractors or Thrashers. 1. Fixed Investment; 2. Inventory Investment. 
  4. Net Export (X-M): Net exports refers to the difference between exports and imports during an accounting year. Exports are the expenditure by the foreigners on the domestically produced final goods and services, while imports are an expenditure on the goods and services produced abroad. 
Measurement of National Income using Expenditure Method.
(+) Private Final Consumption Expenditure (C)
(+) Government Final Consumption Expenditure (G)
(+) Gross Doestic Fixed Capital Formation 
(+) Change in stock or Inventory Investment 
(+) Net Exports (exports-imports) (X-M)
=   Gross Domestic Product at market price (GDPmp)
(-) Depreciation 
=  Net Domestic Product at market price 
(-) Net Indirect Taxes 
=  Net Domestic Product at factor cost (NDPfc)
(+) Net Factor Income from Aborad 
=  National Income (NNPfc)




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