Question

Output methods of measuring national income of india

Answer 1

The following points highlight the three methods for measuring national income. The methods are: 1. The Product (Output) Method 2. The Income Method 3. The Expenditure Method.

1. The Product (Output) Method:

The most direct method of arriving at an estimate of a country’s national output or income is to add the output figures of all firms in the economy to get the total value of the nation’s output. The outputs can be grouped into certain product categories corresponding to industries or to sectors (such as the primary sector, secondary sector and the tertiary sector).

2. The Income Method:

The second approach is to measure incomes generated by production. Income from employment (item no. 1 in the Table) is wages and salaries. Income of self-employed persons (item number 2) includes both wages and return on capital owned by self-employed persons (who are treated as firms in microeconomics). Item number 3 is to be interpreted in a broad sense. It includes not only the rent of land but also the rent of buildings, plus royalties earned from patents and copyrights. Thus, it is a partly of return to land and partly a return to capital. Item number 4 is the major part of return on capital to the private sector. Likewise, item number 5 is the major part of the return to capital for the public sector. Item number 6 is depreciation which is the reduction in the value of capital goods due to their contribution to the production process.

3. The Expenditure Method:

From the expenditure side national income is calculated by adding up the flows of expenditure needed to purchase the nation’s output. However, while estimating the value of national product by the expenditure method we must only record final expenditures. We have to exclude all the expen­diture on intermediate goods and services. While measuring national in­come total final expenditure (TFE) is divided into four broad categories: consumption, investment, government expenditure (spending), exports and imports. These four components may now be further developed.