What are three measurements of National Income
Answers
□ Three Measurements of National Income :-
- National Income calculated by three ways :
- Consider the following while calculating National Income through :-
■ Value Added Method :-
- The value added or production method is used by economists to calculate GDP at market prices, which is the total values of outputs produced at different stages of production. It needs to be mentioned that caution should be taken to take final Goods and not Intermediate goods, as it will result in Double Counting.
- Some of the goods and services included in production are:
☆ Goods and services actually sold in the market.
☆ Goods and services not sold but supplied free of cost. (No Charge/Complementary)
- Some of the goods and services not included in production are:
☆ Second hand items and purchase and sale of the same. Sale and purchase of second cars, for example, are not a part of GDP calculation as no new production takes place in the economy.
☆ Production due to unwarranted/ illegal activities.
☆ Non-economic goods or natural goods such as air and water.
☆ Transfer Payments such as scholarships, pensions etc. are excluded as there is income received, but no good or service is produced in return.
☆ Imputed rental for owner-occupied housing is also excluded.
■ Income Method :-
- This method emphasises on aggregating the payments made by firms to households, called factor payments.
- It is defined as total income earned by citizens and businesses of a country. There are four types of factors of production and four types of factor incomes accordingly i.e. Land, Labour, Capital and Entrepreneur/Organization as Factors of Production and Rent, Wages, Interest and Profit as Factor Incomes correspondingly.
- GDP = Wages+ Interest Income + Rental Income +Profit +Indirect Taxes Subsidies+ Depreciation
- The term Profit can be further sub-divided into: profit tax; dividend to all those shareholders; and retained profit (or retained earnings).
- Such an approach is adopted in India to calculate the contribution of services sector to the economy.
- Any income corresponding to which there is no flow of goods and services or value added, it should not be included in calculation by Income method.
■ Expenditure Method :-
- The expenditure method measures the final expenditure on GDP. Amount of Expenditure refers to all spending on currently-produced final goods and services only in an economy. In an economy, there are three main agencies, which buy goods and services. These are: Households, Firms and the Government.
- This final expenditure is made up of the sum of four expenditure items, namely :-
- Consumption (C) :- Personal Consumption made by households, the payment of which is paid by households directly to the firms which produced the goods and services desired by the households.
- Investment Expenditure (I) :- Investment is an addition to capital stock of an economy in a given time period. This includes investments by firms as well as governments sectors.
- Government Expenditure (G) :- This category includes the value of goods and service purchased by Government. Government expenditure on pension schemes, scholarships, unemployment allowances etc. are not included in this as all of them come under transfer payments.
- Net Exports (X-IM) :- Expenditure on foreign made products (Imports) are expenditure that escapes the system, and must be subtracted from total expenditures. In turn, goods produced by domestic firms which are demanded by foreign economies involve expenditure by other economies on our production (Exports), and are included in total expenditure. The combination of the two gives Net Exports.
☆ GDP= C+I+G+X-IM
☆ C = consumption
☆ I = Investment
☆ G = Government expenditure
☆ X = Export
☆ IM = Import
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What are three measurements of National Income