Primarily there are three methods of measuring national income. Which method is to be employed depends on the availability of data and purpose. The methods are product method, income method and expenditure method. Product method is given by Dr. Alfred Marshall, income method by A.C. Pigou and expenditure method by Dr. Iriving Fisher.
According to product method, the total value of final goods and services produced in a country during a year is calculated at market prices. According to this method only the final goods and services are included and the intermediary goods and services are not taken into account.
According to income method, the net income payments received by all citizens of a country in a particular year are added up. The net incomes earned by the factors of production in the form of rent, wage, interest and profit aggregated but incomes in the form of transfer payments are not included in the national income.
According to the expenditure method, the total expenditure incurred by the society in a particular year is added together. There expenditures include personal consumption expenditure, net domestic investment, Govt, expenditure on goods and-services, and net foreign investments, Govt, expenditure and net foreign investment. According to these methods total expenditure equals the national income.
The above three methods, it applied give identical results. It is wise to use any method in measuring national income. The use of the above three methods depends on the level at which the national income is calculated. The product method is used at the product level. Income method is used at income level and expenditure method is used at expenditure level. As all the three methods are used to measure the lame physical output at three phases, namely production, distributions and expenditure, they will provide the same national income. Below is given a chart showing the reconciliation of the three methods of calculating GDP at market price.
The choice of above three methods depends on the level at which the national income is calculated. The product method is the principal method used in underdeveloped economies, whereas income method is generally used in developed economics for the estimation of national income.
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