MEASUREMENT OF NATIONAL INCOME

Output Method or Production Method – Also called the value added method.
Under this method, the economy is divided into different industrial sectors and the
net value added at factor cost (NVAFC ) by each productive enterprise as well as by
each industry is estimated. Value of output of an enterprise is found out by
multiplying the physical output with market prices of the goods produced.
To calculate NVAFC, we need to subtract:
1) Intermediate consumption
2) Depreciation
3) Net indirect taxes
Summing up NVAFC by all productive enterprises of a sector gives us the NVAFC of
the sector. We then add up NVAFC by all industries or sectors to get Net domestic
product at factor cost (NDPFC).
If we add the net factor income from abroad to the NDPFC we get the Net national
product at factor cost (NNPFC) which is also called the national income.
NI or NNPFC = NDPFC + Net factor income from abroad

2. The Income Method – This method measures national income at the phase of
distribution and appears as income paid and or received by individuals of the
country, i.e. national income is obtained by summing up of the incomes of all
individuals of a country.
National income is calculated by adding up the rent of land, wages and salaries of
employees, interest on capital, profits of entrepreneurs and incomes of self-
employed people.
By summing up the incomes paid out by all industrial sectors we will obtain
domestic factor income or NDPFC. If we further add the net factor income from
abroad to the NDPFC we get the Net national product at factor cost (NNPFC) or
national income.

3. The Expenditure Method - National Income can also be measured by

aggregating the flow of total expenditure on the final goods & services in the
economy. It can be observed that the flow of the total expenditure can be measured
by aggregating the flow of expenditure of final goods & services incurred by each of
the three main sectors involved, viz. household sector, business sector & the
government sector.
 1. Expenditure on consumer goods and services by individuals and households,
C.

2. Government’s expenditure on goods and services, G.

3. The expenditure by productive enterprises on capital goods and inventories,

called gross domestic capital formation and denoted by I.

4. Net exports, X-M or Xn.

Adding the above four we get GDPMP. On deducting depreciation, we get NDPMP.
If we further deduct net indirect taxes we get NDPFC. If we add the net factor
income from abroad to the NDPFC we get NNPFC.

All the above methods, will give the same result.

EXAMPLE

OrangeInc Transactions
Wages paid to employees $ 15,000
Taxes paid to Government 5,000
Revenue received from sale of oranges 35,000
Oranges sold to public 10,000
Oranges sold to JuiceInc 25,000

JuiceInc Transactions
Wages paid to employees $ 10,000
Taxes paid to Government 2,000
Oranges purchased from OrangeInc 25,000
Revenue received from sale of orange juice 40,000
1.National Income by Product approach
Orange Inc revenue = $35,000
Juice Inc.’s value added = $ 15,000
Total value added in the economy = $ 50,000

2.National Income by Income approach

Profit of OrangeInc = $ 20,000
Wages received by employees of OrangeInc= $15,000
Profit of JuiceInc = $ 5,000
Wages received by employees of JuiceInc = $ 10,000
Total income received = $ 50,000

3.National Income by Expenditure approach

Expenditure on oranges = $ 10,000
Expenditure on juice = $ 40,000
Total expenditure = $ 50,000
The final output in the modern economy consists of a large number of goods such as
cars, bikes, watches, pens etc., services such as medical, educational etc. Let Q1, Q2,
Q3, .... Qn denote the amounts of each of these different types of final outputs in a
given year. Their respective market prices are Pi, P2, P3,.... Pn. n is the total number
of goods & services produced in the economy in that year then, according to the
product approach, the size of National Income will be equal to the sum of the annual
flow of final goods & services valued at their respective market prices
i.e. NI = P1Q1 + P2Q2 + P3Q3 + ..... PnQn

= ∑ PiQi
The value added by a given business firm to total national output is the difference
between the value of output produced by that firm & the total expenditure incurred
by it on the materials & intermediate products purchased from other business firms.
To arrive at the net value added at factor cost we also exclude the depreciation and
the net indirect taxes.

Value Added = Total sales + Closing stock of finished & semi finished goods -
total expenditure on materials & intermediate products purchased from other farms -
opening stock of finished & semi finished goods.

National Income can also be measured by aggregating the annual flows of factor
earnings generated by the production of the final output.
For instance, the value of output of good is also reflected in the sum of the
corresponding factor income generated.
i.e. Pi Qi = Ri + Wi + Ii + Bi
where Ri, Wi, Ii & Bi are respectively the flow of rent, wages, interest & profits
(benefits) generated by the production of good.
i.e. NI = ∑ (Ri + Wi + Ii + Bi)

NI = Eh + Eb + Eg
where, Eh, Eb, Eg denote the annual flow of expenditure on final goods &
services incurred by the household sector, business sector & the government
sector respectively.