National income measurement

National Income
• Three aspects of National Income:
a) Production aspect
b) Income or distribution aspect
c) Expenditure aspect

• Production Aspect: It points to flow of
goods and services in the economy or
process of value adding.
• Income or distribution aspect: It points out
to generation of income in terms of wages,
rent, interest and profit.
• Expenditure aspect: It indicates disposal
of income in terms of consumption
expenditure or investment expenditure.

Product method or value-added
method
• Product Method or Value-added method is that
method which measures national income by
estimating the contribution of each producing
enterprise to production in the domestic territory
of country in an accounting year.
• Value of output=Sales + change in stock (if
some output remains unsold at the end of year)
• Change in stock = closing stock-opening stock

Estimating Value Added
Item
produced
Value of
Output
Inter
-mediate
goods
Value
Added
Wheat 600 200 400
Flour Mill 800 600 200
Baker 1000 800 200
Shop-
keeper
1200 1000 200
Total 3600 2600 1000

• Thus, the gross value added by all producing
enterprises is Rs (400+ 200+200+200 = 1000)
• Gross value added by all producing enterprises
within the domestic territory of a country during
the period of one year is called GDP at M.P.
• Thus, Gross Value added by all producing
enterprises in (PRIMARY SECTOR +
SECONDARY SECTOR + TERTIARY SECTOR)
=GDP at M.P.

Measurement of N.I. (value-added
method)
• GDP at M.P {Gross value added in
Primary-sector + secondary sector+
tertiary sector} - Depriciation =
N.D.P. at M.P. - Net Indirect Taxes =
N.D.P at F.C. + NFYA = NNP at F.C.
(National Income)

Precautions regarding Product-
method or Value –added method
• Sale and purchase of second-hand goods is not
included in value- added. Because, value of
second hand goods is already accounted for
during the year of production.
• Commission earned on sale and purchase of
second hand goods is included.
• Own account production of goods is taken into
account. They are simply not sold owing to their
need by producers themselves.
• Value of intermediate goods is not included,
because value of intermediate goods is already
reflected in value of final goods.

• Imputed rent of owner occupied houses is
also taken into account, because all
houses have rental value.
• Services for self-consumption is not
considered, because it is difficult to
estimate their market-value
• Value added in Govt. sector is equal to
compensation of employees only.

Problem of double-counting
• The problem of double-counting is the
problem of estimating the value of goods
and services more than once.
• This leads to over-estimation of value of
goods and services produced.

How to avoid double-counting?
1) Final output method- According to this method, value
of intermediate goods is deducted from value of
output. In other words, value of final goods and
services only is included in National Income.
Value of Final Output= {Value of output-value of
intermediate goods} (3600-2600=1000)
2) Value-added method- Value-added refers to the
difference between value of output and value of
intermediate consumption of each producing unit.
SUM-TOTAL of value-added by all producing units
within the domestic territory of a country is equal to
domestic-product. (400+200+200+200)

Income-Method
• Income-method is that method which measures
National-Income in terms of payments made in
the form of wages, rent, interest and profit.
• What are Factor-Incomes?
• Factor-Incomes are earned-incomes, transfer
payments are unearned.
• Factor-incomes are rewards for rendering factor-
services. Transfer payments are just one-sided
payments. No service is rendered in return for
transfer payments.

Classification of Factor-Incomes
COMPENSATION OF EMPLOYEES
It includes:-
a) wages and salaries in cash
b) payment in kind
c) employers’ contribution to social-
security scheme
d) pension on retirement

• OPERATING SURPLUS:
• It includes income from property and
entrepreneurship. It is earned in both
private and Govt. sector. It includes:
• Rent
• Interest
• Profit (Dividend + corporation tax + saving
of enterprise or undistributed profits)

• MIXED INCOME:
• Mixed- Income refers to the income of SELF-
EMPLOYED persons using their labour, land,
capital and entrepreneurship to produce goods
and services. These incomes are mixed in terms
of wages, rent, interest and profit. That is why, it
is called mixed income.
• NDP at F.C. = sum-total of factor-incomes
generated within domestic territory of country
during an accounting year.

Measurement of National-
Income(Income- Method)
• NDP at F.C. {compensation of
employees+operating surplus+mixed
income}
• +
• NFYA {Net factor income from abroad}
• =
• NNP at F.C. {National Income}

Precautions while estimating
Factor-Incomes
• Transfer-earnings like old-age pensions,
unemployment allowances, scholarships, pocket
expenses etc. should not be included in N.I.
Because, corresponding to transfer-payments,
there is no value-addition in the economy.
However, it should be remembered that
retirement pension is included in N.I. as it is a
part of compensation of employees.
• Income from illegal activities not to be included.
• Sale proceeds of second-hand goods not to be
included.

• Sale-proceeds of shares and bonds are not included in
N.I. Because such transactions are not related to flow of
goods and services.
• Windfall gains, like lotteries and capital-gains not to be
included as there is no value addition corresponding to
windfall gains.
• Imputed rent of owner-occupied houses is included in
N.I.
• Goods for self-consumption should be included.
• Indirect taxes like sales-tax, excise-duty, tend to
increase M.P. of goods and services. These are included
in estimation of N.I. at M.P. but are NOT to be included
while estimating N.I. at F.C.

• Corporate tax, dividends and undistributed
profits are all components of corporate profits.
Once profit is included in N.I, any of these
components should not be separately added.
• Income-tax is paid out of compensation of
employees. It should not be separately added.
• Gift tax, wealth tax, taxes on windfall gains are
paid not out of current income but out of past
savings of tax-payer. These are not to be
included in estimation of N.I

EXPENDITURE METHOD
• Expenditure Method is the method which
measures final expenditure on GDP at
M.P. during an accounting year. FINAL
EXPENDITURE is equal to GDP at MP.
This is also called Income-Disposal
method.

What is Final-Expenditure?
• It refers to expenditure on final goods and
services in an year.
• If an enterprise uses goods purchased
from other enterprises for re-sale or as
raw-material, the expenditure on such
goods will be inter-mediate expenditure.
• On the other-hand, if goods and services
are produced for final consumption, the
expenditure on them is final expenditure.

Classification of Final - expenditure
1) PRIVATE FINAL CONSUMPTION
EXPENDITURE:
• It refers to expenditure on final goods
and services by individuals, households
and non-profit organizations.
2) GOVT. FINAL CONSUMPTION
EXPENDITURE:
• It refers to expenditure on final goods
and services by Govt.

3) INVESTMENT EXPENDITURE: It refers to
expenditure on purchase of final goods by
producers. These goods are to be further used
in process of production. Investment
expenditure is classified as:
• A) Fixed Investment (by business, household,
Govt.)
• B) Inventory Investment: It refers to change in
stock (closing stock-opening stock)

4) NET EXPORTS (X-M)
It refers to difference between exports and
imports during an year.

Measurement of N.I(expenditure
method)
1) Final consumption expenditure
{Private+Government} +
2) Gross Domestic Capital Formation {Gross
domestic fixed capital
formation(business/govt/household) + Change
in stock (closing stock-opening stock)}
+
3) Net Exports (Exports-Imports) =
4) GDP at M.P. – depriciation = NDP at M.P.- Net
Indirect Taxes = NDP at F.C + NFYA = NNP at
F.C.

From the following data, calculate
Net National Income
Particulars (In crores)
1 Current transfers frm ROW 100
2 Govt. final consumption exp 1000
3 Wages and salaries 3800
4 Dividend 500
5 Rent 200
6 Interest 150
7 Net Domestic Capital
Formation
500

8 Profits 800 Crores
9 Employers’ contribution to S.S. 200
10 Net exports -50
11 NFYA -30
12 Consumption of fixed-capital 40
13 Pvt. Final consumption exp 4000
14 Net Indirect tax 300

Income-Method
• NDP at F.C. = COE+ OS+ MI
= (wages &
salaries+employers’contribution) +
(rent+interest+profit) + 0
= (3800+200) + (200+150+800) +
0 = 5150 crores
NNP at F.C. = NDP at F.C. + NFYA
= 5150 + (-30) = 5120 crores

Expenditure Method
• GDP at M.P. = PFCE + GFCE + GDCF +
Net Exports
= 4000 + 1000 + (500+40) +
(-50)
= 5490 crores
NNP at F.C. = GDP at M.P – Dep + NFYA -
NIT
= 5490 – 40 + (-30) – 300
= 5120 crores

Items In crores
1 Current Transfers frm Govt. 25
2 Govt. Final consumption exp 200
3 NDP at FC acc to Govt. sector 90
4 Compensation to Govt.
employees
80
5 Net Exports -50
6 Interest on National Debt 60

7 Depriciation 30 crores
8 Net Domestic Capital Formation 100
9 Net factor income paid abroad 20
10 Pvt. Final consumption exp 600
11 Net Indirect Tax 40
12 Net Current Transfers frm abroad -10
13 Corporation Tax 30
14 Subsidies 10
15 Savings of Pvt. sector 50

Calculation of NI (exp method)
• GDP at M.P = PFCE + GFCE + (NDCF
+Dep) + Net Exports
= 600 + 200 + (100+30) +
(-50)
= 880 crores
NNP at F.C. = GDP at M.P – Dep + NFYA
- NIT
= 880 – 30 + (-20) – 40
= 790 crores

To calculate Personal Income
• NDP at F.C. = NNP at F.C. – NFYA
= 790 – (-20)
= 810 crores
Income from Domestic Product acc to
Pvt. Sector = NDP at F.C – NDP at F.C
acc to
Govt. sector
= 810 – 90
= 720 crores

• Private Income = IDPAPS + NFYA +
Current Transfers from Govt + Current
Transfers from ROW +Interest on National
Debt. = 720 + (-20) + 25 + (-10) + 60
= 775 crores
Personal Income : Private Income –
corporate tax – corporate savings
= 775 – 30 – 50
= 695 crores

National income measurement

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National income measurement