Measurement of National Income

Measurement of National Income

Since factor incomes arise from production of goods arid services, and since incomes are expended on goods and services produced, three alternative methods of measuring national income are possible.

a) Output Method:
This method is also called as production Method. It consists of following three stages.

1) Estimation of the gross value of domestic output in the various sectors of production.
2) Determination of cost of materials used, services rendered to these sectors by other sectors of production and also annual depreciation value, of the plants and equipments used in these Sectors.
3) Deduction of costs and depreciation values from the gross value production which gives (derives) net value of domestic output.

b) Income Method:
Under output method, the net output estimates are obtained. This estimate is regarded as the equivalent of the value of sales of the output. This is the income to producer while receipts of the factor suppliers. This income comprises-

i) Wages earned by the workers, salaries of staff, social Security, bonus etc.
ii) Earning of self employed persons, dividends of shareholders
iii) Rent of land, factories and business premises.
iv) Interest on capital and earnings of public enterprises the sum of all above gives us National Income.

c) Expenditure Method:
Under this method, estimation of the disposal of income on the purchase of final goods end services has been done. It includes following.

a) Personal consumption expenditure of households.
b) Gross private domestic investment, i.e. business spending on capital goods.
c) The net foreign investment, i.e. net Spending by foreign nationals.
d) Govt. purchases of goods and services.

Method used in India:
The National Income Committee used a combination of Income method and the Product (output) method for estimating nationa1 income. In the agriculture and industry sectors the output method (product method) is used. Here net value of product arc computed and incorporated in national income. But in the fields of commerce, transport, banking the income method is used. The National income involves the value of products and income earned by the people engaged in service sector.

Difficulties In measurement:
In, under-developed countries like India many difficulties are to be faced in estimating national income. They are:

  1. Prevalence of non monetized transactions in agriculture still lot of product does not come into the market, It consumed at farm level.

  2. Illiteracy – Due to illiteracy it is not possible to keep regular account.

  3. Occupational specialization is incomplete.

  4. Lack of adequate statistical data.

  5. Estimation of value of inventories i.e. raw material is very difficult.

  6. Estimation of depreciation on capital goods and avoiding double counting is too much difficult.

Use of National Income data: It is very useful to measure economic welfare, determine standard of living of a community, similarly to assess economic development and for comparison purpose the national income is must.

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