MACRO ECONOMICS

ASSIGNMENT 1

SUBMITED BY- HARSHA OJHA

QUES, 1 -- WHAT ARE THE VARIOUS METHODS OF CALCULATING NATIONAL

INCOME ?

There are three methods to calculate National Income:

1. Income Method

2. Product/ Value Added Method

3. Expenditure Method

1. INCOME METHOD

In this National Income is measured as flow of income. Under this method,

national income is measured as a flow of factor incomes. There are generally four
factors of production labour, capital, land and entrepreneurship. Labour gets
wages and salaries, capital gets interest, land gets rent and entrepreneurship gets
profit as their remuneration.

We can calculate NI as:

NET NATIONAL INCOME = Compensation of Employees+ Operating surplus mixed

(w +R +P +I) + Net income + Net factor income from abroad.

Where,

W = Wages and salaries

R = Rental Income

P = Profit

I = Mixed Income
 2. Product/ Value Added Method

In this National Income is measured as flow of goods and services.

In this method, national income is measured as a flow of goods and services. We

calculate money value of all final goods and services produced in an economy
during a year. Final goods here refer to those goods which are directly consumed
and not used in further production process.

We can calculate NI as:

NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT

TAXES

3. Expenditure Method

In this National Income is measured as flow of expenditure. n this method,

national income is measured as a flow of expenditure. GDP is sum-total of private
consumption expenditure. Government consumption expenditure, gross capital
formation (Government and private) and net exports

Components of Expenditure Method:-

(i) Private Final Consumption Expenditure(C)

(ii) Government Final consumption Expenditure(G)

(iii) Investment Expenditure(I):

It includes, = Business Fixed Investment (Purchase of fixed assets)

+ Residential Construction

+ Public Investment (Roads, dams, bridges)

+ Inventory Investment (change in stock)

+ Net Acquisition of Valuables(Gold, Diamonds)

(iv) Net Exports (X-M) = Exports – Imports

GDPMP = C+I+G+(X-M)

Domestic Income (NDPFC) = GDPMP –Depreciation-Net Indirect Taxes

We can calculate NI through Expenditure method as:

National Income=National Product=National Expenditure.