Approach:
Briefly explain the concept of national income.
Explain the value added, income and expenditure methods of estimating national income.
Conclude with a brief note on the methods employed in India.
Answer:
National Income refers to the money value of all the goods and services produced in a country during a financial year. It is generally calculated in terms of GDP or GNP at factor cost (i.e. costs of all the factors of production) or at market price (which includes cost of production, indirect taxes and subsidies for the producers). The national income can be estimated by various methods like value-added method, income method and expenditure method.
Value-added method: Also known as product method or inventory method, it consists of finding out the market value of all the goods and services produced in a country during a given period. The value of intermediate products consumed for production of final goods is deducted so that doubling of values is eliminated. The value of depreciation of equipments during the process of
production and indirect taxes is also deducted. The total of the estimates gives us net domestic product at factor cost classified by industrial origin. The addition of net income from abroad to this gives us net national income at factor cost.
NNPFC = GDPMP – consumption of fixed capital (Depreciation) + Net Factor Income from Abroad – Net indirect Tax
where, NNPFC = Net National Product at Factor Cost, GDPMP = Gross Domestic Product at Market Prices
Income method: This method consists of adding together all the income that accrues to the factors of production i.e. human labour, capital, fixed natural resources (land) and entrepreneurship by way of wages, interest, rents, and profits respectively during a given period. National income is net domestic factor income added with net factor income from abroad.
NNPFC = NDPFC + Net Factor Income from Abroad.
Where, NDPFC = Net Domestic Product at Factor Cost Expenditure method: In this method, the total sum of expenditure on the purchase of final goods and services produced during an accounting year within an economy is estimated to obtain the
values of national income. The expenditure may be classified into four categories viz. Private final consumption expenditure, Government final consumption expenditure, Investment expenditure or gross domestic capital formation, and Net exports (exports – imports).
GDPMP = Private final consumption expenditure + Government final consumption expenditure + Investment expenditure + Net exports (exports – imports).
NNPFC= GDPMP – Depreciation + Net Factor Income from Abroad-Net Indirect Tax
In India, there is varied use of these methods to calculate the national income. The CSO calculates value addition done through activities like agriculture, forestry, fishing, mining & manufacturing, construction etc. using the value-added method. Under expenditure method, the CSO adds up various components of expenditure i.e. Private Final Consumption, Government Final Consumption, Gross Fixed Capital Formation, Net of Exports and Imports.
