Question

Explain the three methods of calculating national income.

Answer 1

Method # 1. Production Method or Value Added Method:

To obtain national product figure of a country, we aggregate the money value of all final goods and services produced in a country in a year. The figure that we obtain is called GNP or GDP. [For the moment, we won’t make any distinction between these two concepts.

Method # 2. Income Census Method:

Instead of concentrating on output data, now we use income figures to obtain a measure of output. This method of calculating GNP involves measuring the income generated by selling output. By selling outputs, firms earn revenue. This revenue is utilized for the payment of rent, interest, wage, indirect tax payments as well as for buying inputs and enjoys what is left-over as profits.

Revenue = rent + interest + wage + costs of intermediate inputs + indirect taxes + profit

Method # 3. Expenditure Method:

The third or final approach is to add up all expenditures on final goods and services. In fact, this approach is another way of calculating the value of final goods of the economy. This approach considers where those goods go. There are four possibilities— some final goods are consumed by individuals, some are used by firms, some are purchased by the government, and some of them go abroad.