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Methods Of Measuring National Income

The national income can be seen in three ways, namely in terms of the operations of the producing units, in terms of people as suppliers of the primary factors of production and in terms of the spending units. There are, thus, three aspects of national income, namely as an aggregate of net products, as an aggregate of primary incomes and as an aggregate of final expenditure Correspondingly, we have three methods of measuring national income, namely, the production method, the income method and the expenditure method respectively.

Each method gives a different viewpoint of national income. The production method gives net national product on the basis of the industrial origin of value added, the income method yields national income on the basis of factor income sand the expenditure method gives net national expenditure based on aggregate expenditure. Yet the total of these methods must be equal because these methods are only different viewpoints of the same flow of goods and services.

Production Method Or Value Added Method

In this method, the producing units are classified into three major sectors viz., primary sector, the secondary sector and the tertiary sector. These sectors are further sub-divided into sub-sectors. The primary sector may thus be divided into agriculture, animal husbandry, fishery, forestry etc., the secondary sector may be divided into consumer goods units and capital goods units and the service sector may be divided into trade, transport, communication, banking finance etc.


For each producing unit, data regarding its gross output intermediate goods and services used and depreciation of capital goods is required. From the gross output the value of raw material and intermediate products is subtracted to get the value of gross Value-added. From this, the value of depreciation is subtracted to get the net-value added by the producing unit. When the net-value added by the economy, which is nothing but Net Domestic Product. If the information regarding the final output and intermediate goods is available in terms of market price we can convert it in terms of factor costs by subtracting indirect taxes and adding subsidies. To this figure when we add net income from abroad we get Net. National Product at factor cost, which is National Income.

Income Method

Since whatever is produced by a producing unit is distributed among the factors of production for their services; we can also find national income by aggregating the factor incomes of all the factors of production of all the producing units. 
It is to be noted that only incomes earned by the factors of production, as a result of their productive activities, are included in national income. Secondary or transfer incomes are not included in it. Thus, we include wages of labourers but exclude pension of retired workers. Labour incomes include besides wages and salaries, bonus, commission, employer's contribution to provident fund, compensation in kind like food, clothing etc. Capital income includes dividends, undistributed proms of companies before taxes, interest, rent, royalties, and profits of unincorporated enterprises and of Government enterprises.

Sometime it is difficult to separate labour incomes from capital incomes especially in the cases of self- employed people like lawyers, engineers, traders, proprietor's etc. Moreover, in case production takes place for subsistence basis, as is the case with many under-developed countries it becomes difficult to differentiate between labour income and non-labour income. In such cases, incomes or the people would be mixed type. In order to tackle such cases, a new category of incomes, called mixed income, has been introduced which includes all those incomes, which are difficult to segregate.

It should be noted that transfer incomes are not to be included in the national income. These incomes are a part of household or personal income but not of national income. Net income from abroad needs to be added if national income is calculated from data regarding incomes paid out by producers. But if it is calculated from data regarding income received by the people then net income from abroad need not be added separately as it is already included in the incomes received by the people.

Expenditure Method

The incomes received by the various factors of production are either spent by these factors or are saved. Or we say these incomes are either spent on consumer goods and services or are spent on non-consumption goods or capital 
goods. While calculating national income by expenditure method, only expenditure on final goods and services is included; expenditure on raw materials and intermediate goods and services is excluded because otherwise there would be double counting of some items of national income. Expenditure on financial assets (except for net expenditures on foreign financial assets) and expenditure on goods produced during the preceding period are also excluded while calculating national income by this method.

Expenditure on final goods and services is broadly classified into expenditure on consumer goods and services and expenditure on capital goods or investment expenditure. Consumption expenditure is classified into private consumption expenditure of the household sector and Government consumption expenditure.

Similarly, investment expenditure is classified into, private investment expenditure by business sector and investment expenditure by Government. The private consumption expenditure by the household sector is on consumer goods and services. Government consumption expenditure is on, administrative services, defence, law and order, education and public utilities etc. Investment expenditure by private organisation or by Government can be categoriesed into replacement investment, net fixed investment, and inventory investment. When replacement investment is included then total expenditure in the economy will be called gross expenditure and when they are excluded then the total expenditure will be net expenditure. Net fixed investment and inventory investment represent the increase in the stock of capital goods in the economy. They are included in the total expenditure, whether gross or net, domestic or national. Replacement investment, net fixed investment and inventory investment together constitute gross domestic investment.

To calculate 
gross national investment we need to add net foreign investment to gross domestic investment. Thus, the aggregates resulting from the expenditure method measured at market price are as follows:

Gross National Expenditure – Consumption expenditure + net domestic investment + net foreign investment + replacement expenditure.

Net National Expenditure – Consumption expenditure + Net domestic investment. + Net foreign investment. Net Domestic Expenditure – Consumption expenditure + net domestic investment.


Ideally, the national income should be calculated by the above three methods separately, as it gives a three dimensional view of the economy. The production method shows the relative contribution of the different sectors to the national income. The income method provides information about the factoral distribution of incomes in the economy. The expenditure method provides information about the levels of consumption and investment in the economy. Moreover these methods provide a check on the accuracy of one another. But, because of lack of reliable data, it is very difficult to use all these methods. In fact, in developing countries like India depending upon the type of data available in any sector, the appropriate method is used for it. For example, in India, in agricultural sector net value added is estimated by the production method and in small-scale industrial sector it is estimated by income method.

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