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Measurement of National Income

Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods:
  1. Output or Production method
  2. Income method, and
  3. Expenditure method.
Let us discuss these methods in detail.

Output or Production Method

This method is also called the value-added method. This method approaches national income from the output side. Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. Then, the gross product is found out by adding up the net values of all the production that has taken place in these sectors during a given year.
In order to arrive at the net value of production of a given industry, intermediate goods purchases by the producers of this industry are deducted from the gross value of production of that industry. The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP. If we deduct depreciation from the GNP we get NNP at market price. NNP at market price – indirect taxes + subsidies will give us NNP at factor cost or National Income.
The output method can be used where there exists a census of production for the year. The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy.

Income Method

This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country. Thus, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs and income of self-employed people.
This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc.

Expenditure Method

This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government: -
  1. Expenditure on consumer goods and services by individuals and households denoted by C. This is called personal consumption expenditure denoted by C.
  2. Expenditure by private business enterprises on capital goods and on making additions to inventories or stocks in a year. This is called gross domestic private investment denoted by I.
  3. Government’s expenditure on goods and services i.e. government purchases denoted by G.
  4. Expenditure made by foreigners on goods and services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports – imports denoted by (X – M). Thus, GDP = C + I + G + (X – M).
India has been successful in achieving autonomy in producing different basic and capital products since independence. Since independence to 1980 there was restrictive growth of private sector and government's permission was required to set up any private enterprise in India. Other factors such as poverty and famine lowered India's economic growth rate during this period. Post 1980s India saw liberalization and achieved further impetus in Mid-1991.
The Industrial Policy Resolution of 1948 marked the beginning of the evolution of the Indian Industrial Policy. In the Industrial Policy of 1948, the importance of both public sector and private sector was accepted. However, the responsibility of development of basic industries was handed over to Public Sector.
The Industrial Policy Resolution of 1956 gave the public sector strategic role in the economy. It categorised industries which would be the exclusive responsibility of the State or would progressively come under state control and others. Earmarking the pre-eminent position of the public sector, it envisaged private sector co-existing with the state and thus attempted to give the policy framework flexibility.
The main objective of the Industrial Policy of 1956 was to develop public sector, co-operative sector and control on private monopoly. There were four categories of industries in the Industrial Policy of 1948 which was reduced to three in the Industrial Policy of 1956.
In 1973, Joint Sector was constituted on the recomendations of Dutta Committee. The Industrial Policy of 1980 was influenced by the concept of federalism and the policy of giving concession to agriculture based industries was implemented through in it. Various liberlised steps to be taken were declared at comprehensive level, in the Industrial Policy declared on 24th July, 1991.

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