Methods of Measuring National Income generating process creates

Methods of Measuring National Income generating process creates two kinds of flows a. Product flow b. Money flow As factor Payments for goods and services Economists have devised three methods of Measuring NI 1. Net Product method or Value Added Method 2. Factor Income Method 3. Expenditure method

Net Product Method-The value Added Method • Gross Value : Output is classified under various categories. The classification varies from country to country and it depends on • i. The nature of domestic activities • Its importance in economic activities. • Availability of the requisite data. In India Income and Output methods are used by the CSO to estimate national Income of country. Output method for agriculture and Manufacturing. Income method for service sector. CSO adopts 15 sectors for estimation of National Income.

Classification into 15 sectors for estimation of NI • • • • Agriculture Forestry and Logging Fishing Mining and Quarrying Large-scale Manufacturing Small-scale Manufacturing Construction Electricity, gas and water supply Transport and communication Real estate and dwellings Public administration and defence Other services External Transactions NI is calculated both at factor cost at current prices and at constant prices.

Net Product Method-The value Added Method • After classifying the output in appropriate categories. The gross value of output of each category is computed by any one of the method By multiplying the output of each category or sector by their respective market prices and adding them together. By collecting the data on gross sales and inventories from the records of the companies and adding them up.

Cost of Production • After computation the next step is estimating the net national product is to estimate the intermediate cost of production including depreciation. Estimating cost and depreciation is a difficult task.

Value Added method • In the net product method, a serious problem is often confronted i. e. , double counting to avoid this value added method is adopted. Deducting the costs and depreciation from gross value to obtain the net value of domestic output.

Factor Income Method • The factor income method is also known as factor share method. • Incomes accruing to the basic factors of production used in producing the national Products. National income(GDP) is treated as the sum of factor payments viz. , rent, wages, interest and profits plus depreciation. As it is difficult to determinate between land -capital and labour – entrepreneur, therefore only labour income and capital income and mixed income( labour and capital ).

Expenditure method • i. Income disposal method under this method, all the money expenditures at market prices are added up together to obtain the total final expenditure's. private consumption exp. ii. Direct tax. iii. Payments made to the non-profit like schools, hospitals, orphanage, etc iv Private savings. • Product Disposal method : value of the products finally disposed of are computed and added together. This gives a measure of the total final expenditure and hence, a measure of the national income by expenditure method. I private consumer goods and services ii private investment goods iii public goods and services and iv net investment abroad.