Three methods of measuring national income. Methods for Measuring National Income 2019-01-10
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Measuring National Income (GDP)
One can however obtain an estimate of national income by summing up the private incomes after making necessary adjustments for the items excluded from the national income. The merchant renders trading service of creating place and time utility, and thus sells the stock of bread to the final consumer at Rs. Income product is equal to the sum of wages, salaries, supplementary labor incomes, interest, profits, and net rent paid or accrued. Government Expenditure: Money that government spends falls into two categories, one is called transfer payments. Therefore, all such services are regarded as final goods and are included in national income. The firms sell their final output to consumers — the households.
Why do all three methods of calculating the national income give the same value?
Q Per Capita Income: The average income of the people of a country in a particular year is called Per Capita Income for that year. Stock Adjustment and Capital Gains and Losses: Finally, stock appreciation adjustment has to be made in order to eliminate the element of windfall gain in the profits received. The income of these individuals are called mixed incomes and are also accounted for calculating the national income. Domestic income includes: i Wages and salaries, ii rents, including imputed house rents, iii interest, iv dividends, v undistributed corporate profits, including surpluses of public undertakings, vi mixed incomes consisting of profits of unincorporated firms, self- employed persons, partnerships, etc. Thus, there is a flow of final goods from the productive area or firms to the consumption area of households.
The method for calculating National Income by Output: The output method, which is the combined value of the new and final output produced in all sectors of the economy, including manufacturing, financial services, transport, leisure and agriculture. If those products were counted at every stage, they would be included many a time in the national product. In this case, national income is greater than domestic income. In fact, the market prices of most of the commodities that we buy include indirect taxes and some of them include an element of subsidy. Statistical information regarding agriculture and allied occupations, and household enterprises is not available. Hence national income can be defined expressed in three ways, i. Economic activities should be distinguished from the non-economic activities from a national point of view.
Do we express statistics in terms of market prices or constant prices? It is that part of economic theory which deals with the individual parts of the economic system like individual households, individual firms, individual industries, etc. It has proved to be more practical also. Thus, only those services for which payments are made should be included. Double counting means the counting of the value of goods and services at more than one stage i. This type of economy is called a open economy.
Examining the three methods of calculating national income
However, certain precautions are necessary while following this method. The mill sells the flour to the baker and fetches Rs. Product Method of Measure National Income The second approach to estimate national income consists of measuring the output of all producers and to deduct from this total the intermediate purchases. Stock appreciation and discrepancies are taken into account too. Now the total income earned is spent on the output produced in the economy and therefore the income equals the expenditure in the economy.
IB Economics/Macroeconomics/Measuring National Income
To solve this problem, economists calculate the real national income at a constant price level by the consumer price index. With a view to removing these personal and regional disequibria, the decisions to levy more taxes and increase public expenditure also rest on national income statistics. Article shared by : Three main methods of estimating national income: i the census of products method, ii the census of income method and, iii the expenditure method! O Disposable Income : Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families. Under this method, national income is measured as the total sum of the factor payments received during a certain time period. A preferable alternative is to total the values added at each stage of production.
Explain the difference between the three main methods of calculating national income
Central, state or local governments spend a lot on their employees, police and army. But there is one exception. Normally this period consists of one year duration, as a year is neither too short nor long a period. Thirdly, we have to measure purchases of goods and services made in a year. Similarly, people of a country spend on imports of goods and services from other countries. But as they satisfy human wants and receive payments for their services, their services are included as final goods in estimating national income. If all such differences are added up for all industries in the economy, we arrive at the gross domestic product.
3 Alternative Methods Used for Measuring National Income
Similarly, some goods and services, e. The imported goods are not produced within the country and hence cannot be included in national income, but the exported goods are manufactured within the country. To avoid double counting, we must add only the final products. But they are not included in national income because they were counted in the national product in the year they were manufactured. Price Changes: National income by product method is measured by the value of final goods and services at current market prices. However, all such expenses including the salaries of armed personnel are included in national income. The Value Added Method In the value added method of measuring national income, the value of materials added by producers at each stage of production to produce the final good is considered.
These refer to net national income and net national expenditure, which ultimately equal each other. They are the actors, dancers, doctors, singers, teachers, musicians, lawyers, barbers, etc. Difficulties or Limitations in Measuring National Income : There are many conceptual and statistical problems involved in measuring national income by the income method, product method, and expenditure method. Double counting means that a particular commodity or service like raw material or labour, etc. And to this, must be added income from abroad. The Income Method: The second approach is to measure incomes generated by production.
Such goods are purchased by one firm from the other for use as raw material or for resale. Thus, while using the income method we must only take into account those which have been earned for services rendered and in respect of which there is some corresponding value of output. In addition, from the value of the products of industries must be deducted the cost of raw materials and products and services provided by other industries. Government makes payments in the form of pensions, unemployment allowance, subsidies, interest on national debt, etc. This is the net annual income or revenue of the country or the true national dividend.
