• Firstly it measures the market value of annual
• Secondly National income is a monetary measure.
• Thirdly national income includes the market
• value of all final goods the value of intermediate
products are not included.
• A final product is one which is available for
• For example, a car or a sewing machine. The
example of intermediate product is raw materials
The figures produced can be in various forms:
Current prices (CP) - Transactions valued at prices
that exist in the current time period. These are also
called nominal prices.
Constant Prices (KP) - The number of transactions
can be viewed as the effect of rising prices has been
taken out and all transactions are expressed in a
common set of prices. For example, these could be
the prices that existed in 1999 - termed the 'base
year'. These are called 'real ' figures
• Assume that we are measuring the output of the economy
through the production of cheese sandwiches. Each
sandwich is priced at £1.50. In 2002, the economy produced
1000 sandwiches, so total GDP would equal £1500. In 2003,
the economy produced 900 sandwiches, but prices rose to
£2.00 each. This would give a 'nominal' GDP of £1800. It
looks as though the country is better off following a £300
rise in GDP but we are actually producing less. If we use the
constant prices method we could express both 2002 and
2003 output at the same price level. So if we used 2002 as
the base year, then output in 2003 would be recorded as
900 x £1.50 = £1350. This would more accurately reflect
what happened to economic activity. Alternatively, we could
record the measure in 2003 prices. This would give us a
measure in 2002 of 1500 x £2.00 = (£3,000) compared to
£1800 in 2003.
Methods of Measuring NI
• Net out put or Value added methodProduct
• Factor income methodincome
• Expenditure Method
Net out put (or) Value added method
• There are three stages in this method :
• I Stage: Estimating the gross value of domestic output in
the different sectors of the economy like industry,
agriculture, transport etc.
• II Stage: Determining the money value of raw material
and services used and also the depreciation of physical
assets used in the process of production .
• II Stage: Deducting the costs and depreciation from the
gross value of domestic output calculated in stage I.
• Aggregate of the value added of all sectors in
the economy during a year is called national
income by product method or net national
Calculate net value added at factor cost from the
1.Purchase of materials
Solution:-- GVA MP = Value of output – Intermediate Consumption
Sales + change in stock – Intermediate
(Rs. In crores)
Factor Income Method
• Known as income method and factor share
• NI= Rent+ Wages +Interest+ Profit
• In this method income received by all the
basic factors of production in the production
process are summed up .
• Total factor incomes are grouped under three
categories :i)Labour income ii)capital income
and iii) Mixed income
• The income method measures national
income from the side of payments made to
the primary factors of production in the form
of rent, wages ,interest and profit for their
productive services in an accounting year.
TYPES OF INCOME
• Labour income: Consists of wages, salaries,
bonus and social security and welfare
• Capital Income : Includes dividends ,pre –tax
retained earnings, interest on savings and bonus,
rent, royalties and profits of government
• Mixed income: Earnings from professionals,
farming enterprises, etc
• These components of income are added together
to get national income
• Components of domestic income:• 1.Compensation of employees :Labour Income:This is the
reward or compensation paid to employees for rendering
productive services. It includes wages and salaries,Employer’s
contribution to social security schemes, dearness allowance,
bonus, city allowance, house rent allowace, leave travelling
• 2.Operating surplus(Corporate Income) It includes rent, profit
and interest. Profit includes corporate tax, dividend and
• 3.Mixed income of self employed:- Income of own account
workers like farmers, doctors, barbers etc, and
unincorporated enterprises like small shopkeepers, repair
shops retail traders etc, is known as mixed income.
• Expenditure Method :
• Expenditure method :It is also known as
final product method. In this method total
national expenditure is the sum of
expenditure incurred by the society in a
particular year .
Components of Expenditure Method
• GDP = C + I + G + (X-M)
C: Household spending (consumption)
I: Net domestic Investment spending
G: General Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
(Expenditure are personal consumption expenditure,net
domestic investment ,government expenditure on
goods and services and exports minus imports)
• Income method and product method are
often employed for calculating national
income .But expenditure method is difficult
method because of the reliability of data .
• Product method is used in agriculture and
• Income method is used to find the
contribution of services sector.
• Measurement of NI in India :
• CSO (Central Statistical Organisation) is given
the task of estimating national income in India
& publishes its estimates in its publication,
Estimates of National Income .
• CSO has adopted 15 break ups of the economy
for estimating the NI.