Production generate incomes which are again spent on goods and services
produced. Therefore, national income can be measured by three methods:
1. Output or Production method
2.
Income method, and
3. Expenditure method.
Let us discuss these methods in detail.
1. Output or Production Method: This method is also called the value-added method. This method
approaches national income from the output side. Under this method, the economy
is divided into different sectors such as agriculture, fishing, mining,
construction, manufacturing, trade and commerce, transport, communication and
other services. Then, the gross product is found out by adding up the net
values of all the production that has taken place in these sectors during a
given year.
In order to arrive at the net value of production of a given industry,
intermediate goods purchases by the producers of this industry are deducted
from the gross value of production of that industry. The aggregate or net
values of production of all the industry and sectors of the economy plus the
net factor income from abroad will give us the GNP. If we deduct depreciation
from the GNP we get NNP at market price. NNP at market price – indirect taxes +
subsidies will give us NNP at factor cost or National Income.
The output method can be used where there exists a census of production
for the year. The advantage of this method is that it reveals the contributions
and relative importance and of the different sectors of the economy.
2. Income Method: This method approaches national
income from the distribution side. According to this method, national income is
obtained by summing up of the incomes of all individuals in the country. Thus,
national income is calculated by adding up the rent of land, wages and salaries
of employees, interest on capital, profits of entrepreneurs and income of
self-employed people. This method of estimating
national income has the great advantage of indicating the distribution of
national income among different income groups such as landlords, capitalists,
workers, etc.
3. Expenditure Method: This method arrives at national income by adding up all the
expenditure made on goods and services during a year. Thus, the national income
is found by adding up the following types of expenditure by households, private
business enterprises and the government: -
(a)
Expenditure on consumer goods and services by individuals and households
denoted by C. This is called personal consumption expenditure denoted by C.
(b)
Expenditure by private business enterprises on capital goods and on
making additions to inventories or stocks in a year. This is called gross
domestic private investment denoted by I.
(c)
Government’s expenditure on goods and services i.e. government
purchases denoted by G.
(d) Expenditure made by foreigners on goods and services of the national
economy over and above what this economy spends on the output of the foreign
countries i.e. exports – imports denoted by
(X – M). Thus, GDP = C + I + G + (X – M)
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