National income is the sum of money value of net flow of all the goods and services produced by normal residents of a country during a period of account.
According to Central Statistical Organization (CSO)
‘National income is the sum of factor incomes earned by normal residents of a country in the form of wages, interest and profit in an accounting year.’
National product is the net output of commodities and services flowing during the year from the country’s productive system into the hands of ultimate consumers or into the net addition to the country’s capital goods.
Methods of Measuring National Income
In every economy the circular flow of production, income and expenditure remains in operation continuously due to the economic activities. Production generates income which leads to the creation of demand for goods and services and hence expenditure. National income can be measured at every stage of circular flow of production, income and expenditure. At production stage net value of final goods and services produced in the country in a year is calculated. It also includes net factor income earned from abroad. At income level net annual factor income is added along with net factor income from abroad. At expenditure level, national income is measured by adding the net value of final expenditure and the net factor income from abroad. Thus there are three methods of measurement of national income:
1. Product Method or Value Added Method
2. Income Method
3. Expenditure Method
Product Method or Value Added Method
This is also known as the ‘Inventory Method’ or ‘Commodity Service Method’. This method approaches national income from the output side. According to this method the economy is divided into different sectors such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services. Then the gross product is find out by adding up net values of all the production that has taken place in these sectors during a given year.
1. Identification and Classification of Productive enterprises.
First of all productive enterprises are identified and then these are classified in three categories:
• Primary Sector
• Secondary Sector
• Tertiary Sector
2. Estimation of Gross Value Added
In this step net value added in each sector is calculated in an accounting year. Gross value added is found by deducting the intermediate consumption from the value of production generated.
Gross Value Added= Value of Production – Intermediate Consumption
Change in Stocks = Final stocks – Initial Stocks
3. Estimation of National Income
After estimating gross value added we can estimate national income in the following categories:
• Net Value Added Market Prices = Net Domestic Product at Market Prices
• Net Domestic Product at Factor Cost = Net Domestic Product at Market Prices- Net Indirect Taxes
• National Income = Net Domestic Income + Net foreign...