National Income and Calculation of National Income

What is National Income? 

Definition: The total value of goods and services which has been produced during the period of one year is called national income.

Explain briefly three different ways of measuring the National Income. Also Enumerate the difficulties faced in measuring National Income.

Methods to calculate National Income:

Following are the three different approaches to measurement of National Income:

Methods to calculate national income

Expenditure approach:

This method arrives at National Income by adding up all the expenditure incurred on goods and services during the year. The National income is calculated by summing up all the conventional and the investment expenditure by individuals, corporations and the government during the given period.

Income approach:

This method measures the National Income after it has been distributed and appears as income earned or received by individuals of the country. In this method National Income is calculated by adding up the rent of land, wages of employees, interest and profit on capital and income of self-employed people.

Value added / output/ production approach:

In this method the National Income is found out by adding up net values of all production that has taken place in all sectors during a given period. The net values of production of all the industries and sectors of the economy plus the net income from abroad give us the Gross National Product (GNP). By subtracting the total amount of depreciation of the assets used in production, from the figure of GNP, we get the National Income.

Difficulties in Measurement of National Income

There are some problems that arise when we measure the national income of a country. Some of these problems are enumerated below:

Difficulties in Measurement of National Income

  • Non-monetized transactions: Non-monetized transactions such as services of housewives and agricultural products used by farmers for own consumption are ignored.
  • Barter transactions: Since no money is involved, these transactions are either totally ignored or included on the basis of approximation.
  • Foreign firms: Income of foreign firms creates complications i.e. whether to include it in national income of the country of operation or country of origin.
  • Lack of trained staff: Collection, compilation and analysis of statistical data is a highly technical exercise and availability of sufficient trained staff is often difficult.
  • Illiteracy/unreliable record keeping: Due to illiteracy, many producers are not able to keep reliable data of their production.
  • Black economy: A significant component of economic activity relates to black economy and is often ignored in such calculations.
  • Danger of double counting: Due to lack of proper documentation and adequate statistical data there is always a danger of double counting of income.
  • Government expenditures: There is always a problem with regard to the treatment of the government expenditure in national income accounts such as whether to include or exclude administration expenses, social welfare expenditure, payment of interest on national debt etc.

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