National income is used to measure the monetary value of the flow of the output of services and goods which are produced in an economy over a specified period. This duration is generally taken to be one year.
It is important for checking the:
National income can be calculated by using three methods or viewpoints, like:
The production method
Production units in any economy get classified into three sectors- primary, secondary and tertiary and by that classification, a value-added method is employed to measure the national income. It is also called the net output method as it is used for measuring the individual contribution of any economy's production units to the gross value added at market price (GDPmp). For calculating national income through this method, one needs to calculate the GDPmp first, the net profit which gets added at the market price (NVAmp) and also the net value which is attached at the factor cost (NVAfc).
The economy is a combination of people on an individual and household level who have different kinds of production factors, and on this combination, the income method is used for estimating the national income. Also known as the factor income method, it is used for calculating all forms of income which gets accrued into the basic production factors. As such, there are four factors of production which are counted- organization, capital, land, and labor. So there are four-factor payments as such too, which are profit, interest, rent, and compensation of employees. The formula used is:
National Income= Rent + Wages + Interest + Profit + Mixed-Income
The economy is also seen as a solid collection of units which are used for saving, consumption, and investment. By these collections, a final expenditure method is devised for calculating the national income. It is also known as final product viewpoint and as such for producing final services and goods within a specified economic territory during an allotted period. This method calculates national income from the purchase side. The final expenditure of any economy gets divided into two expenditure: consumption expenditure and investment expenditure.
These are the three different methods used in calculating national income appropriately and from different viewpoints.
Almost all of us encounter these terms “Income” and “expenditure” in our everyday life, and they do play a major role also. When it comes to income, primarily we talk about the individual’s salary, be it from a business or any other sources and hardly we talk about the National Income.
What is National Income?
National Income is the total worth of all the new goods and services produced in India in one financial year. National Income is homogenesis of Gross Domestic Product (GDP), Gross National Product (GNP), Net National Income (NNI), Adjusted National Income (ANI).
Let’s narrate the different ways to calculate the National Income.
Predominantly there are three ways of calculating the National Income.
Using Value-Added Method
Also called the net-output method, it is used to calculate the total value by adding up the values from each sector in an economy. To calculate the National Income first, you need to calculate the following:
Income Method is used to calculate the total income acquired to the fundamental productional factors used in delivering national products and services. Land, labor, organization, and capital are the four pillars of production.
It also includes different payment factors like Rent, Employee compensation, profits, and Interests. The summation of payments from each factor payments adds up to give NVAfc.
The remaining calculations remain the same.
Final Expenditure Method
Calculates the total expenditure incurred by a production unit for their output goods and services, within fixed economic boundaries and given time.
Consumption Expenditure, consisting of:
Investment Expenditure: Also knows as Gross Domestic Capital Formation (GDCF).
Main formula to calculate National Income using Final Expenditure method:
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