Methods of Measuring National Income

Topics: Economics, Price, Goods Pages: 4 (574 words) Published: February 1, 2013
#Discuss the methods of measuring “National Income”.

Ans: ‘National Income’ means the total value of goods and services produced annually in a country.There are three alternative methods of measuring national income.They are as follows:

1. Production Method
2. Income Method
3. Expenditure Method

These methods are discussed billow:

1. Production Method:

In production method national income is a total monetary value of all final goods and services during a year.

Y = P1X1+P2X2 +P3X3+.......+PnXn
=∑ PiXi

Y = Income
P = Price of Goods
X = Produced Goods
I = 1, 2, 3, . . . n

While measuring national income through this method the following precautions should be followed:

• Value of intermediate goods should not be counted while measuring national income. • The goods and services which have no value in exchange should not be included in counting National Income. • Capital consumptions allowance should be deducted from GNP. • Indirect tax should be deducted from market price while measuring NI through this method. • The income earned from foreign should be included and the amount payable to the foreigners should be excluded from national income. • In this method transfer payment and govt. surplus should be excluded and subsidies should be included. • The excessive profit caused by price hike during inflation and loss caused by price fall should not be included in national income. • The value of illegal goods and services should not be included.

2. Income Method:

Income method arrives at national income summing up of the incomes of all factors employed in production.Therefore under this method national income is obtained by adding up the rent of land,wage of labours,interest on capital,profit of expenditures.

Y = R + W + I + П

Y = Income
R = Rent
W = Wage
I = Interest
П = Profit

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