Measurement of National Income (3 Methods) and their Uses

Read this article to learn about different methods of Measurement of National Income!

Methods:

Since factor incomes arise from production of goods and services, and since incomes are expended on goods and services produced, three alternative methods of measuring national income are possible:

(i) Output Method:

The output method is also called the production method.

It consists of three stages:

First, we estimate the gross value of domestic output in the various sectors of production; then we determine the cost of materials used and of services rendered to these sectors by other sectors of production and also the annual value of the physical depreciation of the plants and equipment used in these sectors; and then we deduct these costs and depreciation value from the gross value of production to derive the net value of domestic output.

The figure so obtained has to be adjusted with net income from abroad. The net value thus arrived at represents the sum total of the income produced originating in different sectors of the economy like agriculture, manufacturing industry and services, including government. This gives us the net domestic product at factor cost classified by industrial origin.

(ii) Income Method:

In the first method, i.e. the output method, we arrive at the net output estimates. But these estimates can be regarded as the equivalent of the value of sales of the output yielding income to the producers and receipts of the factor suppliers. This income comprises wages earned by the workers and salaries of the staff. In the labour income, we also include social security contributions by the employers, bonus, etc.

Then, there are the earnings of the self-employed persons, dividends of the shareholders and undistributed corpor­ate profits, rent of land, factories and business premises, interest on capital and earnings of public enterprises. The income so estimated under the various heads are then added together to arrive at an estimate of the total national income.

(iii) Expenditure Method:

Under this method, we estimate the disposal of income on the purchase of final goods and services.

It includes:

(a) Personal consumption expenditure of households;

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

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

(d) Government purchases of goods and services.

The three methods give the same result. What is remarkable is that in estimating of national income by the above three methods, we arrive at the same figure. This is so because we are only looking at the same thing (i.e. final goods and services) from three angles, viz., the output, income resulting from the output and the disposal of the income, i.e. expenditure on the purchase of the goods and services.

There is, however, a possibility of a discrepancy among the three estimates due to the non-availability of statistics or overlooking of certain item. Thus, suitable adjustments have to be made in the estimates to make them tally. All the three methods may be actually employed or either of the three methods or the three methods may be combined.

Which Method is Suitable?

Which method is actually employed, depends on the stage of economic development of a country or the availability of necessary statistics. In advanced countries, where the required statistical information is available, all the methods may be used. In under-developed countries, like India, complete and accurate statistics are not available.

For instance, people are not in the habit of keeping accounts of personal expenditure. Hence the use of the expenditure method is out of the question. Even statistics of personal incomes are only partially available. Industrial and business houses do maintain proper accounts, but the same thing 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, a bit favourable for the application of the output method. Statistics of production and prices are readily available.

Hence, in the case of under-developed countries like India, the output method seems to be more suitable. But it needs to be supplemented by the application of the other methods where possible to improve the credibility of national income estimates.

Method Used in India:

The National Income Committee used a combination of the “Income Method” and the “Product Method” for estimating national income. In the agricultural and industrial sectors of the economy, the product method was used and the net value of production during the year was computed and incorporated into the national income estimates. But in the fields of commerce, transport, banking and the services, income method was used.

A sample of individual incomes was taken as the starting point and the total income generated in these sectors was estimated by multiplying this representative income by the number of people working in those fields. The sum total of the incomes generated in these various sectors of the economy is the national income of the country.

The National Income Unit of the Central Statistical Organisation (CSO) 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.