Page 224 - DECO405_MANAGERIAL_ECONOMICS

Unit 14: Calculation of National Income

14.1 Product Approach Notes

According to this method, the sum of net value of goods and services produced at market prices
is found. Three steps are involved in calculation of national income through this method:

1. Gross product is calculated by sensing up the money value of output in the different
sectors of the economy.
2. Money value of raw material and services used and the amount of depreciation of physical
assets involved in the production process are summed up.
3. The net output or value added is found by subtracting the aggregate of the cost of raw
material, services and depreciation from the gross product found in first step.

Let us denote the amounts of each of the three different types of final outputs in a given year as
Q , Q , Q ………… Q and their respective market prices as P , P , P ………… P where n stands
1 2 3 n 1 2 3 n
for the total number of final goods and service produced in the economy. Then according to the
product approach, the size of the national income (NI) will be equal to the sum of the annual
flow of final goods and services valued at their respective market prices
i.e., NI = P Q + P Q + P Q + ………… + P Q
1 1 2 2 3 3 n n
Production approach involves estimation of gross value of products, by-products and ancillary
activities of a production unit and deducting from it the value of inputs of raw materials and
other intermediates including services to obtain gross value added.
Broadly speaking the steps involved are:
1. Obtain estimates of quantities of all outputs and all inputs.

2. Obtain estimates of average price for each output and input from market sources.
3. Compute gross value of outputs and inputs using price-quantity data and subtract the
latter from the former to get gross value added.
4. Obtain estimates of value of stocks of fixed assets and apply predetermined depreciation
rates to get capital consumption.
This approach is used to estimate gross and net value added in the following sectors of the
Indian economy:
1. Agriculture and allied activities (e.g., animal husbandry)
2. Forestry and Logging
3. Fishing

4. Mining and Quarrying
5. Registered Manufacturing
For the first three of these sectors, obtaining reliable data on quantities and average prices is a
difficult task particularly for minor products and by-products as also for unorganised part of
fishing activity. CSO uses estimates obtained from a variety of sources such as union ministry of
agriculture, state statistical bureaus, directorate of market intelligence, etc. For registered
manufacturing the Annual Survey of Industries (ASI) gives data on inputs and outputs on a
census basis for larger units and sample basis for smaller units. However, ASI data are often out
of date and several adjustments are required. Corrections for non-response to ASI questionnaires
also have to be incorporated. For mining and quarrying the Indian Bureau of Mines supplies
quantity and value data for inputs and outputs which are supplemented by data from state
governments.

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