Page 27 - DECO303_INDIAN_ECONOMY_ENGLISH

Indian Economy

Notes 2.4 Methods of Calculating National Income

In this section, you will learn about the methods of calculating the national income. There are
three techniques by which national income can be calculated:
1. Product Method: This is also named as the output method, the inventory method or the
census method. It involves finding out the marketplace value of all the goods and services
formed during a year.
According to this method, the economy is categorised into different sectors, namely:

(a) Agriculture industry
(b) Direct sector: In this sector, the value of services of such professions like doctors,
dramatics, soldiers, politicians, etc. are taken by equating to their services.
(c) International transaction sector: In this sector, we take into account the value of goods
exported and imported payment from abroad, payments to other countries.
In each sector, we produce an inventory of goods manufactured and find out the end
product making an addition to the value of goods. The value added method can be followed
in order to avoid double counting. The value added of a firm is its productivity less
whatsoever it purchases from other firms such as raw materials and other inputs.
This technique has a worth because it assist us to have a relative idea of the significance of
various activities in economy like agriculture, manufacturing, trade, etc. However, in
advanced countries this technique may be successful as it is very easy to get facts from
government records. But, in under developed countries, this technique may give rise to
various difficulties like imputation of money values to non-monetized sector.
2. Income Method: This method is described as the gross national income attained by adding
together wages and salaries, interests, profits and rents of persons and organization and
involving government incomes are made either from property or through work. To reach
at the entirety of income of nation, the below procedure will be adopted:
(a) Net rents consist of the rental value of owner occupied houses.
(b) Wages, salaries and all such incomes of person employed, pensions are omitted.
(c) Earnings by way of interest.
(d) Income of joint stock companies.
(e) Income from overseas investment.
This technique gives national income at factor cost.
3. Expenditure Method: This process is also referred to as the flow of product approach (by
American economist Samuelson) or the outlay method.
Here we take into account the expenditure on finished products:
(a) Expenditure by consumers on goods and services.
(b) Expenditure by producers on investment of goods.
(c) Expenditure by government on consumption as well as capital goods.
To this we add money obtained from overseas with the help of trade and other payments.
This number thus attained at will give us G.N.P.
The value of this method is that it believes in the recognition between national expenditure,
income and total product.
Whatever method we use the outcome should be more or less the same. In other words,
they can be used to cross-check reliability of each other.

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