The national income of a country can be measured by three alternative methods: (i) Product Method (ii) Income Method, and (iii) Expenditure Method.
1. Product Method
In this method, national income is measured as a flow of goods and services. We calculate money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process.
Goods which are further used in production process are called intermediate goods. In the value of final goods, value of intermediate goods is already included therefore we do not count value of intermediate goods in national income otherwise there will be double counting of value of goods.
To avoid the problem of double counting we can use the value-addition method in which not the whole value of a commodity but value-addition (i.e. value of final good value of intermediate good) at each stage of production is calculated and these are summed up to arrive at GDP.
The money value is calculated at market prices so sum-total is the GDP at market prices. GDP at market price can be converted into by methods discussed earlier.
2. Income Method
Under this method, national income is measured as a flow of factor incomes. There are generally four factors of production labour, capital, land and entrepreneurship. Labour gets wages and salaries, capital gets interest, land gets rent and entrepreneurship gets profit as their remuneration.
Besides, there are some self-employed persons who employ their own labour and capital such as doctors, advocates, CAs, etc. Their income is called mixed income. The sum-total of all these factor incomes is called NDP at factor costs.
3. Expenditure Method
In this method, national income is measured as a flow of expenditure. GDP is sum-total of private consumption expenditure. Government consumption expenditure, gross capital formation (Government and private) and net exports (Export-Import).
Concept of National Income
National Income is the money value of all final goods and services produced in an economy during a financial year. At the level of an economy, value of fined goods and services is equal to the total income of all factors of production viz labour, capital, land and entrepreneurship.
This total income is equal to total expenditure on goods and services. Therefore, in an economy,
There are different measures of national income like Gross National Product (GNP), Net National Product (NNP), Gross Domestic Product (GDP), Net Domestic Product (NDP), etc.
These are often used interchangeably though conceptually there is some difference among them. Difference between GNP and NNP arises because of depreciation (consumption of fixed capital).
There is same difference between GDP and NDP.
Difference between GNP and GDP arises because of Net Factor Income from Abroad (NFIA).
There is same difference between NNP and NDP.
All the above measures of national income can be calculated at market prices or factor costs. Difference between market prices and factor costs arises because of Net Indirect ‘Taxes (Indirect taxes Subsidies).
All the measures of national income discussed above can be calculated at either current prices or constant prices. When we use current prices (i.e., prices in the year for which national income is being calculated) to calculate value of goods and services, it is called national income at current prices or nominal national income.
On the contrary, when prices of a base year are taken to calculate national income then it is called national income at constant (or fixed prices) or real national income. At present, 1999-2000 is the base year for calculating NI at constant prices.
Conceptually real NNP at factor costs is the most accurate measure of national income but in India, real GDP at factor costs is mostly used because of some practical problems in measurement of depreciation and net factor income from abroad. Thus, economic growth in India generally refers to increase in real GDP at factor costs.
Some related concepts of national income are personal income and disposable personal income.
It is that income which is actually obtained by nationals of the economy. It is obtained by subtracting corporate taxes and payments for social securities provisions from national income and adding to it government transfer payments, business transfer payments and net interest paid by the government.
Disposable Personal Income:
When personal direct taxes are subtracted from personal income, the obtained value is called disposable personal income. In equation form:
Circular Flow of Income:
Basically there are three ways of looking at the circular flow of income. It arises out of the process of activity chain in which production creates income, income generates spending and spending in turn induces production.
Accordingly, there are three different ways in which we can measure the size of the circular flow. We can measure it either at the production stage by measuring the value of output, or at the income accrual stage by measuring the amount of factor income earned, or at the expenditure stage by measuring the size of total expenditure incurred in the economy.