How we can calculate national income with the help of income and production method?
Answers
There are three ways of calculating GDP - all of which in theory should sum to the same amount:
National Output = National Expenditure (Aggregate Demand) = National Income
(i) The Expenditure Method - Aggregate Demand (AD)
The full equation for GDP using this approach is
GDP = C + I + G + (X-M) where
C: Household spending on goods and services
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
The Income Method – adding together factor incomes
GDP is the sum of the incomes earned through the production of goods and services. This is:
Income from people in jobs and in self-employment (e.g. wages and salaries)
+
Profits of private sector businesses
+
Rent income from the ownership of land
=
Gross Domestic product (by sum of factor incomes)
Only those incomes that are come from the production of goods and services are included in the calculation of GDP by the income approach. We exclude:
Transfer payments e.g. the state pension; income support for families on low incomes; the Jobseekers’ Allowance for the unemployed and other welfare assistance such housing benefit and incapacity benefits
Private transfers of money from one individual to another
Income not registered with the tax authorities Every year, billions of pounds worth of activity is not declared to the tax authorities. This is known as the shadow economy.
Published figures for GDP by factor incomes will be inaccurate because much activity is not officially recorded – including subsistence farming and barter transactions
Gross Value Added and Contributions to a nation’s GDP
There are three main wealth-generating sectors in an economy – manufacturing and construction, primary (including oil& gas, farming, forestry & fishing) and a wide range of service-sector industries.
This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. .
Value added is the increase in the value of goods or services as a result of the production process
Value added = value of production - value of intermediate goods