Contents

Introduction.........................................................................................................................................2
Purpose of Measuring National Income.............................................................................................3
Economic Growth............................................................................................................................3
Standard of Living...........................................................................................................................3
Government Policy..........................................................................................................................3
Importance of Measuring National Income.......................................................................................4
Investment Decisions.......................................................................................................................4
Setting Economic Policy..................................................................................................................4
Inflation and Deflationary Gaps.....................................................................................................4
Budget Preparation.........................................................................................................................4
Indicator of Economic Health.........................................................................................................4
Social Welfare Planning..................................................................................................................4
Method of Measuring National Income.............................................................................................5
Product Method or Value-Added Method.....................................................................................5
Income Method................................................................................................................................6
Expenditure Method (GDP)............................................................................................................7
Income and Expenditure of an Economy...........................................................................................9
Income Approach............................................................................................................................9
Expenditure Approach..................................................................................................................10
Limitations in Measuring National Income.....................................................................................11
Exclusion of Non-Market Activities.............................................................................................11
Underreporting of Informal Economy.........................................................................................11
Distributional Inequality...............................................................................................................11
Alternative of National Income........................................................................................................12
Gross National Income..................................................................................................................12
Green GDP.....................................................................................................................................12
Disposable Income.........................................................................................................................12
Conclusion..........................................................................................................................................13

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 Measuring National Income

Introduction
National income is a measure of the total output of the economy of a country over a
specific period, typically a year. It includes both the public and private sectors and
encompasses everything from haircuts to housing, from medical care to national defense.
National income is also commonly referred to as gross domestic product (GDP). National
income is a key indicator of a nation's economic health and is used to assess the standard of
living, economic growth, and distribution of income within the population. A nation’s income
is a fundamental indicator of its economic structure. For example, if you are an investor who
wants to expand your company's horizons within the international market, you should
emphasize the national income of the country you are going to invest in. Therefore, a
country’s national income accounting is critical for its development and planning from
international and national perspectives. Calculating a nation’s income is an effort that
requires rigorous work. In Pakistan, the Pakistan Bureau of Statistics (PBS) measures
national income.

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 Purpose of Measuring National Income
It has the following purposes.

Economic Growth
National income helps assess a country's economic performance over time. Changes
in national income indicate whether an economy is expanding or contracting. National
Income indicates the status of the economy and can give a clear picture of the country's
economic growth. National Income statistics can help economists in formulating economic
policies for economic development.

Standard of Living
National income per capita provides a measure of the average income per person,
offering insights into the standard of living and material well-being of the population.
National income statistics give us much information about how a nation's economic growth
and related objectives such as: quality of life, standard of living of one country compared to
another.

Government Policy
Governments use national income data to formulate economic policies. It helps
policymakers understand the impact of fiscal and monetary measures on the overall economy.
National income accounting provides information on the trend of economic activity level.
Various social and economic phenomena can be explained through the data, which helps the
policymakers in framing better economic policies like monetary policy.

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 Importance of Measuring National Income

Investment Decisions
Investors and businesses use national income data to make informed decisions about
investment opportunities. A growing economy may present favorable conditions for
investments.

Setting Economic Policy

National Income indicates the status of the economy and can give a clear picture of
the country’s economic growth. National Income statistics can help economists in
formulating economic policies for economic development.

Inflation and Deflationary Gaps

For timely anti-inflationary and deflationary policies, we need aggregate data of
national income. If expenditure increases from the total output, it shows inflammatory gaps
and vice versa.

Budget Preparation
The budget of the country is highly dependent on the net national income and its
concepts. The Government formulates the yearly budget with the help of national income
statistics in order to avoid any cynical policies.

Indicator of Economic Health

National income is a crucial indicator of a country's economic health. A rising
national income generally signifies economic growth and improved living standards.

Social Welfare Planning

National income data helps in planning social welfare programs and poverty
alleviation strategies by identifying income disparities and areas requiring intervention.

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 Method of Measuring National Income
There are three main methods of measuring national income.

Product Method or Value-Added Method

This method calculates the total value of goods and services produced in different
sectors of the economy. It focuses on net value addition by each of the components in
production and the following elements should be excluded or subtracted from the output of
the enterprise, raw materials consumption, capital consumption, and net indirect taxes.

Steps to Compute National Income

Step 1: Identification and classification of producing units.

Identify all the producing units in the domestic economy and classify them into the
primary, secondary, and tertiary sector.

Step 2: Estimation of gross value added of each sector.

Gross value added (GVA) = Value of output – Intermediate consumption

Step 3: Estimation of GDP

Then add GVA of all the three sectors, i.e., primary, secondary, and tertiary, to get the
GDP of the economy.

Step 4: Estimation of national income

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 Finally, to determine the national income (NNP) from GDP

Net factor income from abroad (NFIA) is added,

Depreciation is subtracted, and

Net indirect taxes are also deducted.

The formula is as follows:

NNP = GDP – Depreciation + Net factor income from abroad – Indirect taxes + subsidies

Income Method
The income method calculates the National Income based on factor incomes. The
incomes received by every resident of a country for the productive services provided by them
during a year are added together to determine the National Income of an economy. This
method is also widely known as the Factor Payment Method or Distributive Share Method.
The total of all the income earned by factors of production within a domestic territory of a
nation is known as Domestic Income (NDPFC).

Steps of Income Method

Step 1 Identifying Factor of Production

The first step is to identify and classify the factors of production of all the producing
firms into primary, secondary and tertiary sectors.

Step 2 Factor Income Paid (FIP)

The second step of calculating National Income through the Income method is the
estimation of the factor income paid by each sector. The factor income paid by various
sectors are grouped under the heads: Compensation of Employees, Rent and Royalty, Profit,
Interest, and Mixed Income.

Step 3 Calculate Domestic Income

The next step is to calculate domestic income NDP. The total of all the factor incomes
is known as Domestic Income (NDP).

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NDP = Compensation of Employees + Profit + Rent & Royalty + Interest + Mixed income.

Step 4 Estimate NFIA

The last step of calculating National Income through the Income Method is the
estimation of Net Factor Income from Abroad (NFIA). NFIA is added to domestic income
(NDP) to get the National Income (NNP).

NNP = NDP + NFIA.

Expenditure Method (GDP)

This method calculates national income by adding up all the expenditures made in the
economy. It includes consumption, investment, government spending, and net exports
(exports minus imports). It is the most common way to estimate GDP. It says everything that
the private sector, including consumers and private firms, and government spending within
the borders of a particular country, must add up to the total value of all finished goods and
services produced over a certain period of time. This method produces nominal GDP, which
must then be adjusted for inflation to result in the real GDP.

Components of Calculating GDP

There are four components.

 Consumption (C)
 Investment (I)
 Government spending (G)
 Net exports (NX)

Consumption (C)
This represents the total expenditures on goods and services by households in the
economy.

Investment (I)

Investment includes spending on capital goods such as machinery, equipment, and

construction of buildings. It also includes changes in business inventories.

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Government Spending (G)

This component includes all government expenditures on goods and services. It

encompasses spending on defense, education, infrastructure, and other public services.

Net Exports (NX)

This represents the difference between a country's exports (goods and services sold to
other countries) and its imports (goods and services purchased from other countries).

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 Income and Expenditure of an Economy

The income approach to calculating GDP states that all expenditures should equal the total
income generated by all goods and services within the economy. The expenditures approach, on the
other hand, adds up consumer spending, investment, government expenditure, and net exports. The
expenditures method is more widely used.

Income Approach
The income approach focuses on calculating national income by summing up the
income earned by factors of production. The key components include.

• Household Income
It includes wages, salaries, profits, rents, and other forms of earnings received by
individuals and households.
• Business Income
It includes profits earned by businesses after deducting expenses such as salaries,
utilities, and raw materials.
• Government Income
It includes revenue collected by the government through taxes and other sources.
• Foreign Income
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 It Includes income from exports, investments abroad, and other international
activities.
contribute to the national income.
The total income earned in the economy represents the national income. It reflects the
rewards to labor, capital, and land.

Expenditure Approach
The expenditure approach calculates national income by summing up the expenditures
made in the economy. The key components include.

• Consumption
Expenditure on goods and services by households.
• Investment
Expenditure on capital goods and new construction by businesses.
• Government Spending
Expenditure by the government on goods and services.
• Net Exports
The difference between exports and imports.
The total expenditure in the economy represents the national income.

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 Limitations in Measuring National Income
Limitations in measuring national income are.

Exclusion of Non-Market Activities

National income measurements often exclude non-market activities, such as
household work, leading to an incomplete representation of economic activities. If over a
period of years there is a rise in such activities, then this will not be shown in the official
figures and comparisons over several years will be inaccurate.

Underreporting of Informal Economy

Informal economic activities might not be fully captured, leading to an
underestimation of the actual economic output. This is because activities within it cannot be
directly observed, and for the most part, participants in the informal economy do not want to
be accounted for.

Distributional Inequality
National income figures may not provide a complete picture of income distribution
among different segments of the population.

 Data Availability and Accuracy

Gathering accurate and comprehensive data for all economic activities can be
challenging, especially in developing countries or in the case of rapidly changing economic
structures.

 Globalization Issues

The increasing globalization of economies poses challenges in accurately attributing

economic activities to specific countries, especially with multinational corporations operating
across borders.

 Quality of Data

Ensuring the quality and reliability of data used in national income calculations is a
constant challenge. Inaccurate or incomplete data can lead to flawed assessments of
economic performance.

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 Alternative of National Income
Alternative measures to national income include Gross Domestic Product (GDP),
Gross National Income (GNI), Green GDP, and Disposable Income.

Gross National Income

Gross National Income (GNI) is a fundamental economic indicator used to measure
the total economic output generated by a country's residents, regardless of where they are
located geographically. It encompasses the total value of goods and services produced by a
country's residents, including income earned from abroad minus income earned by foreign
residents domestically. GNI provides insight into the overall economic performance and
standard of living within a nation.

Green GDP
Green Gross Domestic Product (GDP) is an alternative measure to conventional GDP
that incorporates environmental factors into economic calculations. Unlike traditional GDP,
which solely focuses on the monetary value of goods and services produced within a
country's borders, Green GDP adjusts this figure to account for environmental degradation
and resource depletion caused by economic activities. It provides a more comprehensive
understanding of economic development by factoring in the costs associated with
environmental damage.

Disposable Income
Disposable income refers to the amount of money available to households and
individuals for spending and savings after taxes and other mandatory deductions that have
been accounted for. It represents the actual purchasing power of individuals and households
and is a crucial metric for assessing standards of living and economic well-being. Disposable
income considers both earned income, such as wages and salaries, and unearned income, such
as dividends and government transfers.

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Conclusion
In short, national income serves as a vital gauge of economic health, influencing
policy formulation and investment decisions. Its components and measurement methods offer
diverse perspectives, but limitations and challenges, such as data accuracy issues and
exclusion of non-market activities, persist. Alternative measures like Green GDP and GNI
provide nuanced insights. Ultimately, understanding national income is essential for shaping
effective economic policies and fostering sustainable development.

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