Computation or Measurement of National Income - Economics Notes Grade XI

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Computation or Measurement of National Income

National income can be measured by using several methods upon the availability of a particular method depend upon the availability of the data in the country and objective of measurement. First of all, Schumpeter suggested three methods of measuring national income.

1. Product method or output method.
In Nepal, the product method is very common to calculate National Income. In this method, national income is measured in terms of output of the country in a given period of time. This method is also called an inventory method or commodity service method. According to this method, the economy is divided into different sectors such as agriculture, mineral, industries, transportation, communication, and other services, and then national income is calculated by adding the money value of final goods and services produced in these sectors during a year. Though this method is very popular in an application, it is not free from the problem of double counting. In order to solve this problem, we can use any of the following two methods.

a. Final Product Method
In this method, national income is measured by finding only the market value of all final goods and services produced in the country during a year but in this method, the problem of double counting may also have appeared, For example, cotton and tobacco of the agriculture sector may also be counted as clothes and cigarettes of industrial products.

b. Value-added method
In this method, the value at a different stage of production is calculated and then added for estimation of national income. The cost of the intermediate product not produced in that stage should be deducted from the total value created in that stage, thus, (Value added = the value of output – cost of intermediate.)

The value-added method can be shown in the following table.

Production stage. Value of output. Cost of intermediate products. Value added.
Wheat(farmer) 100    – 100
Flour(flour mill) 150 100 (150–100)=50
Bread(Bakery) 200 150 (200–150)=50
Total 450 250 200

Let us suppose that there are three stages in bread production until the products reach to the final consumer. A farmer produces wheat = Rs100. Hence, Rs100 is the value added to the economy. He sells the wheat to the flour mill. The flour mill grinds the wheat and sells the flour to the baker at Rs150. Hence, the value added by the economy is Rs50 (150–100). Similarly, the baker sells bread at Rs200 and he adds the value equal to Rs50 (200–150). The sum of value added in each stage of production is Rs200. Rs200 is the final value added to the economy. According to the formula,

Value-added = Total value of output – Cost of intermediate products. = Rs 450 – Rs 250 = Rs 200

2. Income method
In this method, national income is measured from the distribution side of the economy. The income method is also called distributed share method and factor payment method. Goods and services are produced by joint efforts of various factors. Hence, national income is distributed among different factors. Therefore net incomes received by all factors of production are added to obtain the national income it means national income is calculated by adding of the net rent paid to land, the net wage paid to labour, net interest paid to capital, net profit earned by entrepreneurs. Thus,

(G.N.I = Rent + wages + interest + corporate profit + depreciation + net export + net factor income from abroad + indirect tax.) In the context of developing countries, where must of the residents do not pay income tax, this method is not suitable. Thus, this method is most popular is in developed countries.

3. Expenditure method
In this method, national income is measured on the basis of final expenditure. This method is also called income disposal method or consumption and investment method. Final expenditure means expenditure on final products. In this method, national is calculated by adding all the expenditures made by individuals, businessman, the government on goods and services, net export and net factor income from abroad.

G.N.E = C + I + G + (X – M) + NFIA

C = Consumption expenditure.
I = Investment expenditure.
G = Government expenditure.
X = export.
M = Import.

It is very difficult to collect the data on consumption and investment expenditure of millions of people, business firm and government in the estimation of national income by expenditure method. Hence this method is less practical and less useful.

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