Measurement of National Income

Modula 4
 Methods
This can be viewed from three interrelated
angles, such as, in terms of production, income,
and expenditure.
These three terms are broadly related to GNP,
GNI and GNE respectively.
The ideal national income equation shows that
National Income or NI =GNP=GNI=GNE.
Income Approach
Output Approach
Expenditure Approach
 Income Approach
NNP at factor cost OR National Income

W+I+R+P = NNP at factor cost

Profits are stated net of depreciation / capital
consumption allowances
If the figures exclude net income from abroad,
NDP at factor cost can be obtained.
NDP at factor cost + Net income from abroad =NNP fc
 The income method measures national income as the
sum total of factor income shares accruing to the factor
owners.
Factors of Production: Land, Labour, Capital and
Organization. Factor incomes: Rent, Wage, Interest and
Profit.
One can easily aggregate all the factor incomes over a
period of time and this aggregate figure is known as
national income at factor cost.
There are major additions and deductions to the national
income accounting. Additions: Income from foreign
sectors in the form of rent, profits etc. Deductions:
Incomes from all illegal activities: theft, robbery,
smuggling, child labor, etc.
Incomes to the foreign sector acting in domestic sectors
 Output Approach
Product method
NDP at factor cost
The total value of the final goods and services
produced by the primary / secondary / tertiary
industries
The production method measures national
income as the sum of net products produced by
the production units in the given period.
 Steps
Therefore, the production method involves the
following steps:
(i) Identifying the production unit
(ii) Estimating their net products
(iii) Valuing the goods and services The next step
in the production method is the estimation of net
product of each sector. The total estimates
would give us Net Domestic Product at factor
cost.
(iv) Estimation of net income from abroad. The
addition of net income from abroad to this total
would give us net national income at factor cost
 Value added method and Double counting

In order to avoid double counting, the value-

added method is adopted to exclude
intermediate goods.
 Expenditure Approach
People spend their income. Thus, the total
expenditure on final goods and services must be
equal to the total value of final goods and
services produced domestically.
Any output that is not sold to consumers is
bought by producers in the form of unintended
inventory investment.
C+I+G+(X-M) = Aggregate / Total expenditure
GDP at market Prices
 Expenditure Approach
• Private Consumption Expenditure (C)
• Gross Investment Expenditure (I)
Firms : plant (in progress) / unused raw materials
Households : residential building
Inventory investment : intended unintended (reduce information cost)
- gross domestic fixed capital formation*
- change in stocks & work in progress
*gross national fixed capital formation GNP at market prices
• Government Expenditure (G)
roads/education/medical & health services/law & order/public works/…
salary to civil servants, NOT transfer payments
at the cost to taxpayers, NOT at market prices
• Net Exports (X-M)
the value of imports is included in C, I, G, X
Exports include domestic exports & re-exports

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 Items excluded from National
Income Accounting
• Second-hand goods
• Intermediate goods
• Non-marketed goods / services
Volunteer work / Housework
• Unreported / Illegal market transactions

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 Comparison of three Methods
• The product method is very suitable for the primary sector such as
agriculture, industries etc.
• The income method is appropriate for the tertiary and service sectors.
• The Expenditure method is only for the calculation of identical
relationship between three methods. It is because we may not get the
details of all expenditure correctly. Neither it is possible nor it is
desirable to reveal all types of expenditure.
• In fact, the expenditure method is only to complete the identical
relationship i.e.
GNP=GNI=GNE=NI