# Three methods of measuring national income. How is equality of three methods? Reconcile three methods of measuring national income. from Economics National Income Accounting Class 12 CBSE 2019-01-06

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## National Income: Definition, Concepts and Methods of Measuring National Income

Therefore, Even as same 1000 rupee note is given to both parties. The net earnings or loss in foreign trade affects the national income. Â· Income that is not registered. It is the value that can be calculated straight by using the above three methods. The output method is used for agriculture and manufacturing sectors, i. Domestic income includes: i Wages and salaries, ii rents, including imputed house rents, iii interest, iv dividends, v undistributed corporate profits, including surpluses of public undertakings, vi mixed incomes consisting of profits of unincorporated firms, self- employed persons, partnerships, etc. The cost estimates are then deducted from the sectoral gross output to obtain the net sectoral products.

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## Calculating National Income

Each service or product has separate value even if same currency note is used to purchase it I gave a note of Rs. The factor payments are classified into the following groups: i. Precautions: While estimating Gross Domestic Product through expenditure method or measurÂ­ing final expenditure on Gross National Product, the following precautions should be taken: 1. This category also includes the incomes of those who earn their living through various sources as wages, rent on own property, interest on own capital, etc. Should expenditure on government services be included in national income? If in terms of market prices, then figures will be distorted by inflation even though national output may have remained the same. The imported goods are not produced within the country and hence cannot be included in national income, but the exported goods are manufactured within the country. Certain other categories of income such as incomes from incidental jobs, gratuities and tips are ignored because of non-availability of data.

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## Why do all three methods of calculating the national income give the same value?

Value added is the difference between value of output and input at each given stage of production. Final Goods and Intermediate Goods: Simply put, Goods purchased and used up in production process are intermediate goods. Profits: Profits are divided into three sub-groups: i Dividends ii Undistributed profits iii Corporate income tax v. First, it is more difficult to estimate the money value of net consumption than that of net production. Which method is to be employed depends on the availability of data and purpose. In other words, national expenditure in a closed economy is the sum of nation's consumption and its investment.

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## Examining the three methods of calculating national income

Thus, in order to avoid distortions caused by stock appreciation in an inflationary period, a correcÂ­tion has to be made to eliminate changes in the value of stocks due to price changes alone. The difference between the two is only of procedural nature. Under the second method, the following items are considered a Private consumer goods and services, b Private investment goods, c Public goods and services and, d Net investments from aboard. All these are taken as final goods. All transfer expenditure is to be excluded to avoid double counting. Accordingly, the national income equals the sum of the corresponding factor earning.

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## Why do all three methods of calculating the national income give the same value?

Deduction of these costs and depreciation from gross value to obtain the net value of domestic product: Net value of domestic product is often called the value added or income product. One, it is not known whether these things were produced during the current year or the preceding years. There is often no sector by sector breakdown, variations and linkages among components exist, it is difficult to measure and some of the measures can only be guesswork. Intermediate goods are involved in the process of producing final goods â€” the final flow of output purchased by consumers. But the problem is of estimating the current depreciated value of, say, a machine, whose expected life is supposed to be thirty years. These open economics exchange goods and services with rest of the world. Intermediate and Final Goods: The greatest difficulty in estimating national income by product method is the failure to distinguish properly between intermediate and final goods.

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## 3 methods used to measure the National Income of a Country

Circular Flow of Activity : Incidentally, the economic system contains the flow of goods and services in the transactions between two economic sectors: households and firms. The one great advantage of this method is that it reveals the relative importance of the different sectors of the economy by showing their respective contributions to the national income. These costs are deducted from the gross value to arrive at national income. Their values are paid up during the process of production. For estimating national income, however, factor incomes are classified as i labour income, ii capital income, and iii mixed income.

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## Essay on Explain 3 Ways of Measuring National Income of a Country

This concept also refers to the measurement of income at current prices and at constant prices. A good is a tangible or material object like pen, book, shoes, etc. Distinction between microeconomics and macroeconomics. How is a method chosen for measuring national income? One can however obtain an estimate of national income by summing up the private incomes after making necessary adjustments for the items excluded from the national income. Or, the value of inputs, at a given stage, should be deducted from the value of output. It includes payments made to all resources in the form of wages, interest, rent and profits. Measuring National Income National income portrays itself as national product, national expenditure and national income, National Product, national expenditure and national income thus form a circular flow and make it possible to measure national income in three different ways, namely, as a sum of incomes derived from economic activities, as a sum of final expenditure on consumption and investment adjusted for imports and exports; or a sum of value added by the various producing sectors in the country adjusted for factor income payments to and from abroad, care must be taken with regard to the correction for depreciation of capital assets because the various elements in the aggregate are either 'gross' or 'net'.

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## Essay on Explain 3 Ways of Measuring National Income of a Country

It is that part of economic theory which deals with the behaviour of national aggregates. We may also refer to private transfer in this context. The second step is to classify the factor payments. Depreciation equals the loss of national capital in the process of production. Like the value added method, the first step in income method is also to identify the productive enterprises and then classify them into various industrial sectors such as agriculture, fishing, forestry, manufacturing, transport, trade and commerce, banking, etc. These are transfer incomes since they are not payments for services rendered â€” there is no contribution to current real output by the recipients. Government paying salary to staff, buying new tanks and missiles.

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## Measuring National Income

Apparently, both the methods give the same results, because both relate to the same phenomenon, though each in a different manner. This method is used when whole national economy is considered as an aggregate of producing units. International comparisons are even more difficult as the exchange rates fluctuate after 1971, prices and inflation differ in different countries, transport costs must be included, there are different levels of subsistence economy and the govn expenditure patterns differ. As there are two sectors in the economy - productive and household, several measures can be made that reach to roughly the same national income figure and then an average estimate can be calculated. For every subject you can now access each digital resource as soon as it is ordered. Second, according to this definition when only such commodities as can be exchanged for money are included in estimation of national income, the national income cannot be correctly measured. The choice of method depends on the availability of data required for estimating national income.

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