Class XI, Principles of Economics, "Methods of Calculating National Income"

Methods of Calculating National Income

To calculate national income the following three methods are generally used:
1. Net output Method or Production Method
For calculating national income under this method the net output or the production of various commodities is estimated and evaluated at the market prices. For this purpose we take two steps,
Firstly we estimate the monetary value of the commodities that are produced internally .The production or output of different sections of the economy i.e. agricultural, manufacturing, trade, commerce, transport etc is analyzed after deducting the depreciation charges.
Secondly; we consider the foreign business transactions that were performed during the financial year. In this regards in this regard we only consider the difference between exports and imports.
These two aggregate are then summoned up to get the gross domestic product which in turn is deducted from the total revenue earned to arrive at national income. In very simple words the contribution, which each enterprise makes to total output, is equal to its total revenue minus what is paid out to other enterprises and the depreciation of equipment used in the process of production. The production method is the most direct method for calculating national income. It s equation can be written as:
NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES
2. Income Method
Under this method the various factors of production are classified in a few broad categories. The incomes of various and sectors are obtained from there financial statements. Under this method the national income is also estimated by summing up the income that arrives to the factors of production provided by the national residents. Thus the rate at which the national income is distributed among the various factors of production is estimated. This method of calculating national income is quite complex. Usually the undeveloped countries where most of the people are not directly covered by direct taxation. Equation wise the method can represent national income as:
NATIONAL INCOMER = RENTAL INCOME + WAGES + INTEREST + PROFIT
3. Expenditure or outlay Method
This method gives national income by adding up all public and private expenditures made on goods and services during a year. It is obtained by:

• Personal consumption expenditure of goods and services.
• Gross domestic private investment.
• Government purchase of goods and services.
• Net Foreign investment.

It must however be recognized that it is the final expenditure only which must be counted and not the immediate expenditure.