Questions Science and Education

How to calculate national income?

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Airtract

Prerna Das

Do not stop until you are proud

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.

Uses of national income statistics:

It is important for checking the: 

  • Changes in average living standards.
  • The rate of economic growth.
  • Differences were seen in the distribution of income.
  • The Gross Domestic Product (GDP)

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). 

Income method

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

Expenditure method

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.

Airtract

Poonam Choudhry

Exist on your own terms

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:

    • GVAmp: Gross Value Added at market price
      Output Value = Total Sales + Closing Stock – Opening Stock
      where Total Sales = (Quantity of goods produced in a given time) x (Price of each good)
      Therefore, GVAmp = Total Output – Intermediate Consumption;
      where Intermediate Consumption is the sum total of all the non-durable goods/services used during the production.
    • NVAmp: GVAmp – Depreciation
    • NVAfc: NVAmp Indirect Taxes + Subsidies

    • Main Formula of Calculating National Income Using Value-Added Method
      Categorizing each sector as Primary, Secondary, and Tertiary
      Calculate NVAfc from each category.
      ?NVAfc = NDPfc
      Calculate NFIA (Net Factor Income from Abroad)
      NNFpc (National Income) = NDPfc + NFIA
  • Income Method
    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.
    It includes:

  • Consumption Expenditure, consisting of:

    • PFCE: Private Final Consumption Expenditure, comprising of Household’s Final Consumption Expenditure (HFCE) PNPISH Final Consumption Expenditure (PNPISH-FCE).
    • GFCE: Government Final Consumption Expenditure
      GFCE = VVAlue of Output - Sales
  • Investment Expenditure: Also knows as Gross Domestic Capital Formation (GDCF).

    Main formula to calculate National Income using Final Expenditure method:

    • Categorizing each sector as Primary, Secondary, and Tertiary
    • Calculating PFCE, GFCE, GDCF, Net Exports.
    • GDPmp = PFCE+GFCE+GDCF+Net Exports.
    • NDPfc = GDPmp – (Fixed Capital Consumption + Net Indirect Taxes).
    • NNFpc (National Income) = NDPfc + NFIA

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