Calculation of national income PRODUCTION METHOD

According to this method the economy is classified into 3 sectors namely Industrial sector: this sector includes all productive activities Service sector: value of services which directly serve the consumer is taken into consideration External sector: value of exports & imports & receipts from abroad & payments to other countries are taken into account.

NY= (P-D) +(S-T) + [(X-M) +(R-P)]

Precautions

1. 2. 3.

In order to avoid multiple counting only the value of final product must be added that means the value of raw materials & intermediate goods must be excluded. Indirect access should be deducted & subsidies should be added to find out the correct valve of the product. Export income should be added & import expenditure must be deducted.

INCOME METHOD
The income method approaches national income from distribution point of view accordingly the NY is measured after it has been distributed & appears as income earned by individuals or factory owners. The NY is obtained by adding up the incomes of all individuals in a country for a given period of time. Symbolically this method can be expressed as

NY = (R+W+I+s)
Precautions 1. Income from the sales receipts of second hand goods must be excluded but the brokerage on such transactions must be accounted. Transfer payments such as unemployment allowances, pensions, charity, gifts etc. are to be excluded. Financial investments are to be excluded as they do not add to the real national income.

2. 3.

EXPENDITURE METHOD
This method is also known as consumption & investment method. NY from expenditure point of view is the total of consumption expenditure & investment expenditure & govt expenditure symbolically NY by expenditure method can be expressed as

NY = C+I+G
Precautions 1. 2. 3. Expenditure on second hand goods should be excluded. Expenditure on financial assets such as equity share bonds be excluded. Govt expenditure on transfer payments should be ignored.

National income deflator When goods & services produced in a given year is multiplied with their current market prices we get NY at current prices. However, prices do not remain constant. The value of NY at current prices what we get is nominal national income. In order to find out the real rise in NY the physical quantity of output should be multiplied with constant price or base year price. This process is called deflating the NY for the changes in the price during a given period of time. NY at constant = NY at current price * 100 price price index No

2 sector NY = C+S (income method) NY = C+I (expenditure method) C+S = C+I S=I 3 sector NY = C+S+T (income method) NY = C+I+G (expenditure method) C+S+T = C+I+G S+T = I+G 4 sector NY = C+S+T+M NY = C+I+G+X C+S+T+M = C+I+G+X S+T+M = I+G+X S+T-G+M-X = T