Learn about the different measures of national income and their significance in understanding the economic health of a country. Understand the importance of tracking national income for informed decision-making.
Best Measures of National Income
There are possible measures of national income: (a) total income flows, (b) Net outputs, and (c) final expenditures. We have also said that all these methods arrive at the same result. Which of these methods is adopted in actual practice in calculating the national income of a country depends on the nature and condition of its economy as well as the purpose of undertaking this exercise. We discuss below these methods.
Production or Output Method:
This method approaches national income from the output side. According to this method, the economy is divided into different sectors such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services. Then, the gross product is found out by adding up net values of all the production that has taken place in these sectors during a given year.
In order to arrive at the net value of production of a given industry, the purchaser of the producers .of this industry from producers of other industries or sectors arc deducted from the gross value of production of that industry. The aggregate or net values of production of all the industries and sectors of the economy plus the net income from abroad will give us the Gross National Product. By subtracting the total amount of depreciation from the figure of gross national product, we get the net national product, or national income.
This method of estimating national income enables us to trace the origin of the national income aggregate to the different sectors of the economy. Therefore, this is called national income by industrial origin.
This method can be used where there exists a census of production for the year. In many countries, figures of production of only important industries are known. Hence, this method is employed along with other methods to arrive at the national income. 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 contribution to the national income.
Income Method:
This method approaches national income from the distribution sides. In other words, this method measure the national income after it has been distributed and appears as income earned or received by individuals of the country.
Thus, according to this methods, national income is obtained by summing up of the incomes of all individuals in the country. Individuals earn income by contributing their own services and the services of their property such as land and capital to the national production. Therefore, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs (including undistributed profits of joint – stock companies) and income of self – employed people.
This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc. Therefore, this is called national income by distributive shares.
Expenditure Method:
This method arrives at national income by adding up all the expenditure made on goods and services during a year. Income can be spent either on consumer goods or investment goods. Thus, we can get national income by summing up all consumption expenditure and investment expenditure made by all individuals as well as the government of a country during a year. Hence, the gross national product is found by adding up –
- what private individuals spend on consumer goods and services. This is called personal consumption expenditure.
- what private businesses spend on replacement, renewals, and new investment. This is called gross domestic private investment;
- what the foreign countries spend on the goods and services of the national economy over and above what this economy spends on the output of the foreign countries, i.e., exports minus imports. This is called Net foreign investment; and
- what the government spends on the purchase of goods and services, i.e., government purchase.
We have explained above the three alternative methods of estimating national income.