National income is the aggregate incomes of the nation in a particular period of time preferably a year, Different kinds of commodities in various quantities are produced in economy. The goods produced in the economy are called real output. But when the total output of an economy is to be ascertained, we have to express them not in physical terms but in monetary terms.
The money value of different output are taken together in order to arrive at the total value of output. Thus the money value of aggregate output at their respective prices constitutes the national income of an economy. Thus National Income is the aggregate money value of all goods and services produced in a country during one years, National Income is the aggregate of all factor incomes paid in form of rent, interest, wage and profits.
The total incomes received by the factors are spent on the purchase of goods and services so produced. Thus the total national income is the total national expenditure. National expenditure and national product are determined by the National income.
Methods of measurement of National Income:
There are three methods of measuring national income, namely (i) Product method (ii) Income method (iii) Expenditure method.
(i) Product Method:-
Product method is otherwise known as value-added method or output method. According to this method the monetary value of all the final national output in a year is. found out. These outputs include agricultural industrial, mineral Land forest outputs. The monetary values of all the outputs are added together and the aggregate is called gross national product. As the moods are aggregated the totality of the output is called “final I product total”. According to the product method only the final goods are considered in determining national income. But no intermediate goods are considered to ascertain national income.
Bidding up of the value of intermediate goods with the aggregate valuation of national income will give rise to .the problem of double mounting. Double counting means that certain items are counted more than once while calculating national income. Double counting Beans over estimation of values of certain goods. For example while calculating the value of final good bread, the values of wheat Bid flour should riot is incorporated with the aggregate value of BAL good bread. Here bread is the final product and what and Blur is intermediate products. If this is done, the estimation of national income will be faulty and inaccurate.
The price of bread has already incorporated the price of wheat and cereal and “thus it unnecessary to add it further. If the prices of what starting from the cultivation to the final product are added the price of bread will be many times more of the actual price of bread. Thus while calculating national income, separate inclusion of the value of wheat and flour along with the value of final good bread will lead- to double counting and this should be avoided.
This method is also called value added method as the value added or created of different stages of production is counted for estimating national income. Thus the national income is the sum total of value added by different producing units of an economy in the production process. Value added refers to the addition to the value of raw materials and other inputs during the process of production. In order to calculate value added the cost of intermediate production is deducted from the total value of output.
According to this method the sale and purchase of ‘second hand’ goods are deducted from the national income. Incomes earned by certain illegal acts like smuggling, gambling and black marketeering are not also included in the national income. The sale and purchase of bonds and securities are not included in the national product. The net export is included in the calculation of national income.
Depreciation replacement costs are to be deducted from the national income. Since the depreciation charge constitutes an item of cost, the total depreciation undergone by the machinery during one year must be deducted from the national income (GNP). The main advantage of this method is that it indicates clearly the relative importance of the different sectors of the national economy expressing their contribution to the national income of the country concerned. This method can be used only when correct and up- to-date statistical data are available.
(ii) Income Method: –
Income method is also known as distributive is a method or factor payments method. According to this method the incomes received by the factors of agents of production of a country for their productive’ services during a year are added up to compute national income. The incomes in form of rent, wage; interest, profit are taken together to determine national income. The factor incomes can be grouped in the following categories, (a) Wages and salaries of the employees (b) Income of non-company business, (c) Rental incomes of persons, (d) Corporate profits and (e) Income from interest.
The first category includes wages and salaries received the employees. The second category includes the incomes earn by individual proprietors, partners and self-employed persons. The third category includes rental incomes earned by individuals on agricultural and non-agricultural properties. The fourth category includes corporate profit earned by the business corporations and the fifty categories contain net interest earned by individuals from sources other than the organs of the government.
Census of income method broadly is comprised of (a) Compensation of employees (b) Interest (c) Rent (d) Profits and dividends (e) mixed income of self employed. The difference between export and import are also included in the national income. An aggregate of the above five categories of incomes will not be equal to the G.N.P. The reason is that a part of the total expenditure incurred by the community does not become available to the factors of production in the form of incomes. Firstly there expenditure leaks in form of indirect tax levied by the Govt, on goods and services and secondly depreciation of machinery etc. The expenditure spent on goods and services includes the indirect taxes vied by the govt. This indirect tax goes to the Govt, and hence ever comes back to the factor income.
According to the income method the following elements are to be included or deducted from the national income. (1) Transfer payments must not be counted. Transfer payments like unemployment relief, sickness benefit old age pensions and unemployment relief should not be included. Payment for the self- owned factors used in the production processes is to be excluded; undistributed profit set aside by the business enterprise should be eluded in national income.
(iii) Expenditure Method: –
Expenditure method measures national income as the aggregate of all the final expenditure in an economy during a year. Under this method the final expenditure of the entire economy is calculated. This method is otherwise known income disposal method or consumption and investment method, al expenditure means expenditure on final goods. The total come generated in the economy is spent either on consumption goods or on investment goods.
The total final expenditure or national expenditure (Y) represents the sum total of final expenditure incurred on consumption goods (C) and investment goods (I) symbolically Y = C+l. Final consumption expenditure includes (a) private house hold consumption expenditure, (b) Govt, final consumption expenditure, Final investment expenditure includes (a) gross final investment or gross fixed capital formation, (b) Changes stock or inventory investment (c) net export of goods and services net foreign investment.
National Income = C + 1 + G + (x-1)
National Income = Private consumption expenditure + Private investment + Govt. Expenditure + Net export.