PRINCIPLES OF ECONOMICS

ASSIGNMENT-1

Name: Kushal K. Rajput

ROLL NO: 19BCE521

Class: 3BCEDD

Brach: Computer Science and Engineering

PRINCIPLES OF ECONOMICS ASSIGNMENT-1 19BCE521 2HS342

Name:- Kushal K. Rajput Subject:- Principle of Economics

Class:- 3BCEDD Subject Code:- 2HS342
Roll No: -19BCE521 Semester:- 3
Branch:-B.TECH IN CSE (DTOD) Date:- 27/09/2019
ASSIGNMENT -1
Q-1). Explain the different methods of Measuring National Income.
Ans-1)
There are 3-standard methods to measure National Income-
1. Value Added Method/Product Method
2. Income Method
3. Expenditure Method

(1). VALUE ADDED METHOD/PRODUCT METHOD:

 Product method is the method which estimates the national income by
measuring the contribution of final output and services by each producing
enterprise in a country during a given financial year.
 Under this section the India Economy can be divided into three parts.

KUSHAL K. RAJPUT| 19BCE521 PRINCIPLES OF ECONOMICS

PRINCIPLES OF ECONOMICS ASSIGNMENT-1 19BCE521 2HS342

PRIMARY SECTOR:
● The primary sector in India is one of the most important sectors of the Indian
Economy. It involves 2/3 of the total workforce with it.
● It comprises of Agriculture and its associated activities like fishing and mining.
SECONDARY SECTOR:
● The secondary sector involves taking raw materials from the primary industries,
processing/manufacturing from it and selling it to the market.
TERTIARY SECTOR:
● The Tertiary sector involves banking, transport and insurance .In
India ,the tertiary sector is growing at a much faster rate.
 It follows from above that in order to arrive at the net value
added at factor cost by an enterprise we have to subtract the
following from the value of output of an enterprise:

1. Intermediate consumption which is the value of goods such as raw materials, fuels
purchased from other firms.

2. Consumption of fixed capital (i.e., depreciation)

3. Net indirect taxes.

We then add up net values added at factor cost by all industries or sectors to get net
domestic product at factor cost (NDPFC). Lastly, to the net domestic product we add
the net factor income from abroad to get net national product at factor cost (NNPFC)
which is also called national income. Thus,

NI or NNPFC = NDPFC + Net factor income from abroad

This method of calculating national income can be used where there exists a census of
production for the year. In many countries, the data of production of only important
industries are known. Hence this method is employed along with other methods to
arrive at the national income. The one great advantage of this method is that it reveals
the relative importance of the different sectors of the economy by showing their
respective contributions to the national income.

KUSHAL K. RAJPUT| 19BCE521 PRINCIPLES OF ECONOMICS

PRINCIPLES OF ECONOMICS ASSIGNMENT-1 19BCE521 2HS342

(2). INCOME/DISTRIBUTION METHOD:

Income distribution is the equality with which income is dealt out among members of a
society. If everyone earns exactly the same amount of money, then the income
distribution is perfectly equal.
If no one earns any money except for one person, who earns all of the money, then the
income distribution is perfectly unequal. Usually, however, a society’s income
distribution falls somewhere in the middle between equal and unequal.
Here in this method, the income earned by different factors of production i.e. land,
labour ,capital and entrepreneur are added.

National Income Approach

(3). EXPENDITURE INCOME:
● In this method, the consumption expenditure and Investment
expenditure of government and private is added to get the aggregate
value of NI.
National Income = Rent + Compensation + Interest + Profit + Mixed income.
● RENT: Money you pay for the use of land.
● COMPENSATION: Compensation includes salaries and wages that you
earn in exchange for the services and skills that you provide for producing goods and
services.
● INTEREST: Interest refers to the charges you pay for using borrowed capital.
● PROFIT: Profits refer to the money that organizations make while producing goods
and services.

KUSHAL K. RAJPUT| 19BCE521 PRINCIPLES OF ECONOMICS

PRINCIPLES OF ECONOMICS ASSIGNMENT-1 19BCE521 2HS342

● MIXED INCOME: Mixed income refers to the income of the self-employed

individuals, farming units, and sole proprietorships.

● Gross Domestic Product (at market price):

It is the value of total money of all the final goods and services
The formula of calculating GDP is:
GDPMP = ∑ (Pi × Ni) GDPMP = ∑ Value Added
Where Pi = Market price of the goods
Ni = Quantity of the goods
● Market Price:
It is the final value of goods and services after depreciation
● We can calculate Market price as:
NDPMP = GDPMP − depreciation
● Gross National Product at Market Price: GNPMP = GDPMP + NFIA
● Net National product at Market Price: NPMP = GDPMP + NFIA − Depreciation
● Formula to calculate National Income: Sum total of factor income paid out by
industrial sectors =
Compensation of employees + Rent + Interest + Profit = NDPFC
NNPMP = GDPMP + NFIA − Depreciation
● National income = NNPFC = GDPMP + NFIA − depreciation − taxes + subsidies

KUSHAL K. RAJPUT| 19BCE521 PRINCIPLES OF ECONOMICS

PRINCIPLES OF ECONOMICS ASSIGNMENT-1 19BCE521 2HS342

Q-2). Which method is more suitable for Primary, Secondary and

Tertiary Sectors respectively?

Ans-2). The primary sector involves mainly Agriculture and other activities like
fishing, mining, animal husbandry, etc. So here in such kinds of activities, we find out
that they involve the production of certain products that have to be directly added.
And thus PRODUCT METHOD is the most suitable method for is the primary
sector.
● The secondary sector involves the purchasing of raw materials and the
production/manufacturing of the finished goods. This includes industries such as oil
and petroleum, Automobiles, etc. So these final finished products can be added and
thus the PRODUCT METHOD is the best suitable manner.
● The Tertiary sector involves IT, insurance, banking, etc . So we can see that the
output of this is not a physical quantity and thus cannot be directly added up. So here,
we can get the income of different classes and then club them together.
Thus, INCOME METHOD is the most suitable method for the Tertiary sector.

Q-3). Which method is followed in India currently? Elaborate.

Ans-3). A combination of both Value added/ Product method and Income method is
followed by India currently to measure National Income.

In the combination of a mixed method, both the output method and the income
method have been used. The output method has been used largely in the
commodity producing sectors like agriculture and manufacturing.

The income method has been used in the tertiary or service sector like government and
banking, etc. The income method has also been applied to commodity sectors. Where it
is very difficult to obtain net output data.

In using the output method in India, the “value added” approach has been adopted. We
know that the “value added” is equal to the value of goods minus the cost of
production. In other words, this concept measures the net contribution to national
income of a producing unit.
KUSHAL K. RAJPUT| 19BCE521 PRINCIPLES OF ECONOMICS
PRINCIPLES OF ECONOMICS ASSIGNMENT-1 19BCE521 2HS342

The sum total of values added by all the producing units in the commodity sector gives
the value of this sector’s contribution to national income.

The estimation is done by evaluating the value of goods at ex-factory prices and
deducting from it the values of such elements of costs as cost of inputs and
intermediate goods and services supplied by other enterprises as also the estimated
value of capital consumption, i.e., depreciation. In the income method, the procedure is
to find out the number of people working in a profession, and their per head earnings.

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KUSHAL K. RAJPUT| 19BCE521 PRINCIPLES OF ECONOMICS