Measurement of National Income: 5 Main Methods

The following points highlight the five main methods of measurement of National Income.

The methods are: 1. The Census of Products Methods or Output Method 2. Census of Incomes Method 3. Census of Expenditure or Outlay Method 4. Value Added Method and Final Goods Approach 5. Social Accounting Method.

Method # 1. The Census of Products Methods or Output Method:

This method measures the output of the country.

It is also called the ‘Inventory Method’ and involves the assessment, through census, of the gross value of production of goods and services produced in different economic sectors by all the productive enterprises in the economy.

For example:

The producing sectors in India are agriculture, forestry, fisheries, mining industries, transport, commerce and other services. In this method, the aggregated value of total output, real income earned from abroad is added (i.e., add the net difference between the value of exports and imports). And indirect taxes like excise and customs duties, plus depreciation, allowances are to be deducted from the total obtained. Thus, to this net difference of the income earned from the rest of the world, a symbolic expression for this method may be given as follows:

Y= (P – D) + (S -T) + [(X-M) + (R-P)]

where,

Y = total income of the nation, D = depreciation allowance, T = Indirect taxes, M = Imports,

P = domestic output of all production sectors S = Subsidies, X= Exports,

R = Receipts from abroad,

and P = Payments made abroad.

Mostly, this method is adopted in the calculation of national income.

However, there are certain precautions against the danger of double counting etc. which must be strictly adhered to if a correct result is to be achieved.

Precautions which are necessary to observe:

(1) Final products should be used in order to avoid double counting. Raw-materials and intermediate goods should not be included, as that would lead to double counting.

(2) Goods for self-consumption by the producer should be excluded, they have not been marketed, so it is difficult to ascertain their true market value.

(3) When, we are evaluating the output, changes in the price level between the years must be taken into account. It is usual to denote the national income with reference to prices of a particular year.

(4) Indirect taxes, included in prices, are to be deducted for getting the exact market value of the products. Similarly, subsidies given by the Government to certain products should be added in evaluating the product.

(5) Add the value of exports, or the income earned abroad, and deduct the value of imports.

This method is widely used in the underdeveloped countries, but it is less reliable because the margin of error in this method is large. In India, this method is applied to agriculture, mining and manufacturers, including handicrafts. But the census of product method is not applied for the transport, commerce and communication sectors in India.

Method # 2. Census of Incomes Method:

This method is also called the Factor Cost Method. According to this method, the net income payments received by all citizens of a country in a particular year are added up, i.e., net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits are all added together but incomes received in the form of transfer payments are not included in it. The data pertaining to income are obtained from different sources.

Method # 3. Census of Expenditure or Outlay Method:

According to this method the total expenditure incurred by the society in a particular year is added together.

This includes:

(i) Personal consumption expenditure of households,

(ii) The gross private domestic investment i.e., business spending on capital goods,

(iii) The net foreign investment, i.e., net spending by foreign nationals, firms and governments for the country’s goods and services, and

(iv) Government pin-chases of goods and services. This concept is based on the assumption that national income equals national expenditure.

Method # 4. Value Added Method and Final Goods Approach:

Another method of measuring national income is the value added by industries. Here, it has been assumed that the difference between the value of material outputs and inputs at each stage of production is the value added. If all such differences are added up for all industries in the economy, we arrive at the gross domestic product.

Method # 5. Social Accounting Method:

Recently, with the development of social accounting, national income is also being measured by the social accounting method. In the social accounts, the transactions among various sectors such as firms, households, government etc., are recorded and their interrelationships traced. From the total value of these transactions recorded, in matrix forms, the national income value is known.

The social accounting frame work is useful for economists as well as for policy-makers, because it represents the major economic flows and statistical relationships among various sectors of the economic system. It is of particular interest and significance to the policy-makers because by studying the national income series, over a period of time, it becomes possible to forecast the trends of economy more accurately. In many countries, annual economic planning is in the form of national budgets which are, in fact, nothing but forecasts of social accounts for the following year.

From the study of the above five methods what is more important and remarkable is that in estimating of national income by the above five methods. We will practically arrive at the same figure. This is because we are looking only the same thing i.e., final goods and services from various angles as written above. There is however a possibility of a discrepancy among these estimates due to the non-availability of statistics or overlooking of certain items. Thus, suitable adjustments have to be made in the estimates to make them tally. All the five methods may be actually employed or either of the five methods or the five methods may be combined.

Which Method is Suitable?

From the statements given and written above regarding the five methods, it can be said that in case of under-developed countries like India the Census of Product Method or Output Method seems to be more suitable and appropriate. But it needs to be supplemented by the application of the other methods where possible to improve the credibility of national income estimates.

This is because in India complete and accurate statistics are not available. People are also not in the habit of keeping accounts of personal expenditure. Therefore, the use of the expenditure method is not proper. Even statistics of personal incomes are only partially available.

Industrial and business houses do maintain proper accounts; but the something cannot be said about agriculture which accounts for a substantial part of the national income. Hence, exclusive reliance cannot be placed on the income method. Conditions are however favourable to some extent for the application of the Output Method, because statistics of production and prices are readily available.

Method Used in India:

The Bowley-Robertson Committee has suggested the adoption of the census of products method for major sectors of India, and the census of income method for some minor sectors, while the National Income Committee relied mainly upon the census of income method. However, none of the above methods alone is perfect. Therefore, an integrated computation of them will give a wider perspective of the estimate.

The national income unit of the central statistical organisation estimates a major part of the national incomes by the product method, e.g., in sectors like agriculture, animal husbandry, forestry, fishing, mining and factory establishments. And the “income method” is used in the estimation of national income in the case of other sectors.