State the constituents of national income in three phases viz production income and expenditure.how national income is measured in India? Explain the problems and difficulties encountered in computation of national income in India.
Answers
GDP is the total value of goods and services produced within the country during a year. This is calculated at market prices and is known as GDP at market prices. Dernberg defines GDP at market price as “the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year.”
There are three different ways to measure GDP:
Product Method, Income Method and Expenditure Method. These three methods of calculating GDP yield the same result because National Product = National Income = National Expenditure.
a. The Product Method:
In this method, the value of all goods and services produced in different industries during the year is added up. This is also known as the Value Added Method to GDP or GDI at Factor Cost by Industry of Origin.
The following items are included in India in this: agriculture and allied services; mining; manufacturing, construction, electricity, gas and water supply; transport, communication and trade; banking and insurance, real estates and ownership of dwellings and business services; and public administration and defence and other services (or government services). In other words, it is the sum of Gross Value Added.
b. The Income Method:
The people of a country who produce GDP during a year receive incomes from their work. Thus GDP by income method is the sum of all factor incomes: Wages and Salaries (compensation of employees) + Rent + Interest + Profit.
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c. Expenditure Method:
This method focuses on goods and services produced within the country during one year.
GDP by expenditure method includes:
(1) Consumer expenditure on services and durable and non-durable goods (C),
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(2) Investment in fixed capital such as residential and non-residential building, machinery, and inventories (I),
(3) Government expenditure on final goods and services (G),
(4) Export of goods and services produced by people of the country (X),
(5) Less imports (M). That part of consumption, investment and government expenditure which is spent on imports is subtracted from GDP. Similarly, any imported component, such as raw material, which is used in the manufacture of export goods, is also excluded.
Thus GDP by expenditure method at market prices = C + I + G + (X – M), where (X – M) is net export which can be positive or negative.
Component # 2. GDP at Factor Cost:GDP at factor cost is the sum of net value added by all producers within the country. Since the net value added gets distributed as income to the owners of factors of production, GDP is the sum of domestic factor incomes and fixed capital consumption (or depreciation).
Thus GDP at Factor Cost = Net value added + Depreciation.
GDP at factor cost includes:
(i) Compensation of Employees i.e., wages, salaries, etc.
(ii) Operating Surplus which is the business profit of both incorporated and unincorporated firms,
(iii) Mixed Income of Self- employed.
The national income is the income generated by the Government of I ndia after the end of each financial year. It ins the remaining income after the Government has allocated all its expenditure in a given financial year, Its measured by estimating the Countrys Gross Domrstic Products, divided by the total popu;ation to estaplish an individuals per capita income.