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Assignment Nos. 5/ Measuring the National Income Accounts

Submitted by: Ciara Castañeto Submitted to: Prof. Aj Orencia

Date Submitted
April 16, 2021

Section Schedule
Wednesday 4:00-5:30PM
1. How do we measure national income?

The average retail value of output in a country's economy over the course of a year is
referred to as national income. It can be measured in three different ways, all of which
are equivalent:

•The value of expenditures

•The value of inputs used in production

•The sum of value added at each level of production

Think that every good—say, a loaf of bread—can be priced equally as the price
charged in the market by the final buyer or as the allocated factor payments—to labor
(wages) and capital (rent, interest, and profit)—used in its development. Since national
output is the sum of all production, the total value would be the same if final
expenditure or the value of inputs (including profit) used in production are added
together. The value of each final good is precisely the amount of the value added at
each point of development, demonstrating the equivalence of the last metric. Consider
a loaf of bread: Its worth is the amount of the value of labor at each point of processing,
as well as other ingredients added by the farmer (wheat production), miller (flour
grinding), baker (flour + other ingredients), and grocer (flour plus other ingredients)
(distribution services). The monetary value of the flow of output of goods and services
produced in an economy over time is measured by national income. Product method:
National income is calculated using this formula as a flow of goods and services.
During a year, we quantify the monetary value of all final goods and services provided
in an economy. The term "final products" refers to goods that are used immediately
rather than being used in a subsequent manufacturing phase. Income method:
National income is calculated using this formula as a flow of factor incomes. Labor,
money, property, and entrepreneurship are the four main drivers of demand. Labor is
compensated with wages and pensions, capital is compensated with interest, land is
compensated with rent, and entrepreneurship is compensated with benefit.
Expenditure method: National income is calculated using this formula as a flow of
spending. The gross domestic product (GDP) is the balance of all private spending
expenditures. Government spending budget, total capital accumulation (public and
private), and net exports are both factors to consider (Export-Import).

2. What are the problems face in measuring national income.

Problems of Definition: While we should ideally include all products and services
generated during the year, certain services, such as those provided by housewives,
are not measured in terms of income. Lack of Adequate data: The challenge of
estimating national income becomes more acute and complex due to a lack of
sufficient statistical evidence. Non-availability of Reliable Information: Because of their
illiteracy, most farmers are unaware of the quantity and worth of their production and
do not hold daily records. Choice of Method: Choosing a formula for measuring
National Income is also a crucial activity. Bad outcomes are the result of using the
incorrect form. Lack of Differentiation in Economic Functioning: Occupational
specialization is also lacking in both regions, resulting in a lack of distinction in
economic functioning. During the slack season, an individual's income can be derived
in part from farm ownership and in part from manual labor in industry. Double
Counting: When it comes to measuring national revenue, double counting is a major
issue. Since certain commodities are actually used while being used to make others,
the overall value of all goods and services would exceed the national capacity. The
only way to avoid making this mistake is to measure only the worth of the products
and services that are consumed at the end. In measuring national income from the
output side only those items which are purchased and sold through the market are
included. However, all direct sales of various goods and services are excluded. To put
it another way, GDP involves the monetary value of goods traded on the open market
at existing prices. A large majority of the produce in developed countries like India is
not sold on the market. However, these are made with economic capital, and
gratification comes from the use of a variety of non-marketed products and services.
Examples are barter trades and various free resources made at personal amounts.
Many valuable services are produced by members of households for the good of
themselves or their relatives. When husbands and wives cook food, make domestic
renovations, and manage their own finances, they provide valuable services to
themselves and their relatives. Since these services are not purchased by market
sales, the value of these services is not reflected in GDP. The value of work people
do at home for themselves and their families is projected to be around one-third of
India's GDP; if this calculation is right, GDP undervalues the country's overall output
by eliminating non-market household activity.

References:
National Income Accounts. (n.d.). Retrieved from Econlib website:
https://www.econlib.org/library/Enc/NationalIncomeAccounts.html#:~:text=Measu
ring%20National%20Income&text=The%20broadest%20and%20most%20widely

tutor2u. (2020, March 22). Measuring National Income. Retrieved from tutor2u
website:https://www.tutor2u.net/economics/reference/measuring-national-income

3 Important Methods for Measuring National Income. (2012, July 9). Retrieved
from Your Article Library website: https://www.yourarticlelibrary.com/economics/3 -
important-methods-for-measuring-national-income/2792

Difficulties faced in Estimating National Income. (2014, January 6). Retrieved

April 16, 2021, from Your Article Library website:
https://www.yourarticlelibrary.com/economics/national-income/difficulties-faced-
in-estimating-national-
income/23416#:~:text=Six%20major%20difficulties%20faced%20in