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Methods of measuring National Income


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measures of national income

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Methods of measuring National Income

  1. 1. NI MEASURES • Firstly it measures the market value of annual product. • 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 immediate consumption. • For example, a car or a sewing machine. The example of intermediate product is raw materials
  2. 2. 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
  3. 3. • 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.
  4. 4. Methods of Measuring NI • Net out put or Value added methodProduct • Factor income methodincome • Expenditure Method
  5. 5. 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.
  6. 6. • Aggregate of the value added of all sectors in the economy during a year is called national income by product method or net national product .
  7. 7. Calculate net value added at factor cost from the following data Items 1.Purchase of materials 2.Depreciation 3.Sales 4.Excise tax 5.Opening stock 6.Intermediate consumption 7.Closing stock Solution:-- GVA MP = Value of output – Intermediate Consumption Sales + change in stock – Intermediate Consumption (Rs. In crores) 30 12 200 20 15 48 10
  8. 8. Factor Income Method • Known as income method and factor share method. • 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
  9. 9. • 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.
  10. 10. TYPES OF INCOME • Labour income: Consists of wages, salaries, bonus and social security and welfare contributions. • Capital Income : Includes dividends ,pre –tax retained earnings, interest on savings and bonus, rent, royalties and profits of government enterprises. • Mixed income: Earnings from professionals, farming enterprises, etc • These components of income are added together to get national income
  11. 11. • 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 allowance etc.) • 2.Operating surplus(Corporate Income) It includes rent, profit and interest. Profit includes corporate tax, dividend and undistributed profit. • 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.
  12. 12. • 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 .
  13. 13. 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)
  14. 14. • 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 industry sectors. • Income method is used to find the contribution of services sector.
  15. 15. • 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.