Methods of Computing National Income -
October 10th, 2009
Methods of Computing National Income
There are three methods for computation of National Income viz.:-
(i) Total Production Methods (or Value addition method)
(ii) Total Income Method and
(iii) Total Expenditure Method
In spite of three different methods, we should consider (or compute) National Income by all three methods. When a factory makes production of a product, it makes payment not only to suppliers of raw material, but also to its employees, and the employees, in turn makes expenditure for house hold or make saving. Thus all three methods should be used simultaneously.
Total Production Method
In this procedure, total quantity of goods/services is multiplied by market price and the result is Total Production. Following procedure can be a guide:-
(i) Production should be classified as per industry, e.g. (production) agriculture, fisheries, steel & metal, construction, automobile, (service) logistics, legal, medical etc.
(ii) Price of final goods is treated as total production.
(iii) Second hand goods and goods return and resold should not be taken into account.
(iv) Household production (by housewives) is not taken into account.
(v) Assets should be valued after depreciation.
(vi) Price of goods can be taken either (a) market value or (b) determined value or (c) imputed value.
(vii) Some items need special attention like wood (all wood are not sold), agriculture (all produce are not sold), houses (all houses are not rented), hence their imputed value is counted.
(viii) In case where a product goes through various processes along with its own identity, then only the value addition is to be taken. Say milk producer sells milk, cream producer purchases milk and sells cream and sweet producer purchases cream and sells sweets. In this case we should take price of final product and deduct price of intermediate product there from:-
Product Sale price Value Addition
Milk 20 20
Cream 35 15
Sweet 50 15 .
Total 105 50
Hence we take total production of Rs 50/- that’s why it is called value addition.
In the value of final product, we should make following adjustments:-
Deduct from Final Price:-
(i) Price of intermediate goods, (ii) Indirect tax (sales tax, excise)
Add in the Final Price:-
(i) Subsidy received (ii) Rent on self occupied property
(iii) Net factor income from Abroad
Total Income Methods
Under this method total income earned by factors of production is calculated. Each factor gives its contribution and gets consideration. Illustratively, following items are totaled:-
(i) Wages, salary of workers or employees
(ii) Interest on capital, dividend.
(iii) Rent on property rented
(iv) Notional (or imputed) value of rent on self occupied property
(v) Profit of company or profit of self employed person, i.e. operating surplus.
Following points are worth noting:-
(i) Net factor income from abroad shall be added.
(ii) Profit on drawing of goods for self consumption should be added.
(iii) Transfer income (pension, unemployment allowance)should not be added.
(iv) Money transfer (hawala), income tax, gambling income should not be included.
Total Expenditure Method
Under this method, all expenses are counted. Expenses are incurred by:-
(i) Private Consumption:- it includes household consumption and expenditure by non profit organizations. Expenditure on durables (including durables of more than one year like TV and furniture) are included but expenditure on residential building is not included, instead it is counted as capital formation. Rent on self occupied house is also counted. Further agriculture produced and consumed for self, interest on self employed capital is also included.
(ii) Government Consumption, i.e. expenditure made by government, e.g. expenditure to sustain law and justice, health etc. Transfer payments are not included.
(iii) Domestic investment (or capital formation), i.e. expenditure on immoveable goods, and increase (or accumulation) in stock. It includes buildings, road, bridges transport equipment, machinery etc. Work-in-progress, repairing of land & building are not included.