METHODS OF NATIONAL INCOME

THERE ARE THREE METHODS TO CALCULATE THE NATIONAL INCOME:-

1) PRODUCT METHOD/VALUE ADDED METHOD
2) INCOME METHOD
3) EXPENSE METHOD

1) VALUE ADDED METHOD:- THIS METHOD MEASURES THE NATIONAL INCOME BY ESTIMATING THE CONTRIBUTION OF EACH PRODUCING ENTERPRISE TO PRODUCTION IN THE DOMESTIC TERRITORY OF THE COUNTRY IN AN ACCOUNTING YEAR. WE GET GDPMP  IN THIS METHOD...



VALUE ADDITION = PRICE OF PRODUCTION- INTERMEDIATE CONSUMPTION

PRICE OF PRODUCTION:- SALES  + CHANGE IN STOCK

CHANGE IN STOCK = CLOSING STOCK - OPENING STOCK

INTERMEDIATE CONSUMPTION:- IT IS A CONSUMPTION OF GOODS AND SERVICES, NOT FOR DIRECT SATISFACTION BUT FOR FURTHER USE TO PRODUCE GOODS AND SERVICES. eg:- FURNITURE MANUFACTURER PURCHASE WOOD FROM OTHER PRODUCER OF WOOD.

APPROACHES TO CALCULATE THE GDPMP  BY PRODUCT METHOD/VALUE ADDED METHOD:-

1) PRODUCT APPROACH:- THIS LOOKS AT NATIONAL INCOME FROM OUTPUT SIDE.  IN THIS METHOD GDP CALCULATES BY MULTIPLYING GROSS PRODUCT BY MARKET PRICE. IT GIVES GDPMP..
GDPMP = PRICE*GOODS + PRICE*SERVICES

2) VALUE ADDED APPROACH:- IN THIS METHOD GDPMP IS CALCULATED BY THE SUM OF NET VALUE ADDED BY ALL PRODUCING UNITS IN AN ECONOMY DURING AN ACCOUNTING YEAR.

PRIMARY SECTOR + SECONDARY SECTOR + TERTIARY SECTOR = GDPMP

NOTE:- THE ACTIVITY OF ALL THREE SECTORS SHOULD BE SAME.

GDPMP = GROSS DOMESTIC PRODUCT/ GROSS VALUE ADDED BY ALL PRODUCING ENTERPRISE WITHING THE DOMESTIC TERRITORY IN AN ACCOUNTING YEAR.


PRECAUTIONS WHILE CALCULATING NATIONAL INCOME BY PRODUCT/VALUE ADDED METHOD:-

ITEMS WHICH SHOULD BE ADDED:-
1) BROKERAGE OR COMMISSION RECEIVED BY THE BROKERS ON ACCOUNT OF OLD MATERIALS.
2) PRODUCTION FOR SELF CONSUMPTION.
3) IMPUTED RENT ON THE OWNER OCCUPIED HOUSE.

ITEMS WHICH SHOULD NOT BE ADDED:-
1) INCOME EARNED BY SALE-PURCHASE OF OLD OR SECOND HAND MATERIALS.
2) VALUE OF INTERMEDIATE GOODS.
3) SERVICE FOR SELF CONSUMPTION. EXP:- SERVICE OF HOUSEWIFE.

2) INCOME METHOD:- THIS METHOD MEASURES NATIONAL INCOME IN TERMS OF FACTOR PAYMENTS IN PLACE OF FACTOR SERVICES IN AN ACCOUNTING YEAR. BY THIS METHOD WE GET NET DOMESTIC PRODUCT(NDPFC ).

NDPFC:- IT IS THE SUM OF INCOME EARNED AT FACTOR COST WITHING THE DOMESTIC TERRITORY OF COUNTRY.

FACTOR PAYMENTS:- WAGES, RENT, INTEREST AND PROFIT.
FACTOR SERVICES:- LABOUR, LAND, CAPITAL AND ENTREPRENEURSHIP.

FORMULA TO CALCULATE NDPFC BY THIS METHOD

NDPFC :-COMPENSATION TO EMPLOYEES + OPERATING SURPLUS + MIXED INCOME

1) COMPENSATION TO EMPLOYEES INCLUDES:-
A) WAGES AND SALARY,
B) PAYMENT IN KIND,
C) SOCIAL SECURITY,
D) PENSION TO RETIRED

2) OPERATING SURPLUS INCLUDES:-
A) RENT AND ROYALTY,
B) INTEREST,
C) PROFIT[DIVIDEND, CORPORATE PROFIT TAX, UNDISTRIBUTED PROFIT]

NOTE:-
A) DIVIDEND IS THE SHARE OF PROFIT WHICH DISTRIBUTES AMONG THE OWNERS OF A FIRM.
B) CORPORATE PROFIT TAX IS A SHARE OF PROFIT OF CORPORATE WHICH PAYS TO GOVERNMENT IN THE FORM OF TAX.
C) UNDISTRIBUTED PROFIT IS THE PART OF PROFIT WHICH A FIRM HOLD TO FACE ANY LOSS IN THE FUTURE.

3) MIXED INCOME:- MIXED INCOME IS THE SUM OF INCOME EARN BY INDIVIDUALS LIKE SMALL SCALE BUSINESSMEN, FARMERS, DOCTORS, LAWYERS ETC. AND THEY GET FACTOR INCOMES IN PLACE OF THEIR SERVICES.

PRECAUTIONS WHILE CALCULATING NATIONAL INCOME BY INCOME METHOD:-

1) ITEMS WHICH SHOULD BE ADDED:-

1) BROKERAGE OR COMMISSION RECEIVED BY THE BROKERS ON ACCOUNT OF OLD MATERIALS.

2)BROKERAGE OR COMMISSION RECEIVED BY THE BROKERS ON ACCOUNT OF SALE PURCHASE OF SHARES AND BONDS.

3) IMPUTED RENT ON THE OWNER OCCUPIED HOUSE

4) PRODUCTION FOR SELF CONSUMPTION

2) ITEMS WHICH SHOULD NOT BE ADDED:-
1) TRANSFER EARNINGS LIKE PENSION, SCHOLARSHIPS, ALLOWANCES.
2) INCOME FROM ILLEGAL ACTIVITIES.
3) INCOME FROM WINDFALL GAINS LIKE LOTTERY, GAMBLING ETC.
4) INCOME TAX PAID OUT OF COMPENSATION OF EMPLOYEES.

3) EXPENDITURE METHOD:- THIS METHOD MEASURES NATIONAL INCOME IN TERMS OF EXPENDITURE ON FINAL GOODS AND SERVICES PRODUCED IN AN ECONOMY DURING A YEAR.

THIS METHOD CALCULATES FINAL EXPENDITURE ON GROSS DOMESTIC INCOME AT MARKET PRICE. WE GET GDP BY THIS METHOD.

CONSUMPTION = C

INVESTMENT = I

CALCULATION OF GDPMP BY EXPENDITURE METHOD:-

GDPMP = FINAL CONSUMPTION EXPENDITURE + INVESTMENT EXPENDITURE + NET EXPORT

CLASSIFICATION OF FINAL EXPENDITURE:-

1) FINAL CONSUMPTION EXPENDITURE:- IT INCLUDES EXPENDITURE OF BOTH PRIVATE SECTOR AND GOVERNMENT SECTOR.

A) PRIVATE FINAL CONSUMPTION EXPENDITURE:- IT REFERS THE EXPENDITURE ON FINAL GOODS AND SERVICES BY HOUSEHOLDS, NON-PROFIT PRIVATE ORGANIZATION. IT INCLUDES EXPENDITURE ON DURABLE AND

NON- DURABLE GOODS, SEMI-DURABLE, SERVICES.

B) GOVERNMENT FINAL CONSUMPTION:- IT REFERS THE EXPENDITURE ON FINAL GOODS AND SERVICES BY GOVERNMENT. EXAMPLE:- ROADS, BRIDGES, PARKS, HOSPITALS, DEFENCE ETC.

2) INVESTMENT EXPENDITURE:- INVESTMENT EXPENDITURE ARE THOSE EXPENDITURE WHICH SPENT ON THE PURCHASE OF FINAL GOODS BY THE PRODUCER WHICH USE FOR FURTHER PRODUCTION.

IT CLASSIFIED INTO A) FIXED INVESTMENT, B) INVENTORY INVESTMENT.

A) FIXED INVESTMENT:- IT REFERS THE EXPENDITURE ON THE PURCHASE OF FIXED ASSETS LIKE MACHINERY BY THE PRODUCER. IT INCLUDES FIX INVESTMENTS BY ANY BUSINESS, HOUSEHOLD, GOVERNMENT AND PUBLIC.

B) INVENTORY INVESTMENT:- CLOSING STOCK - OPENING STOCK

3) NET EXPORT:- IT IS THE DIFFERENCE BETWEEN THE EXPORT AND IMPORT.

                NET EXPORT = EXPORT - IMPORT

PRECAUTIONS WHILE CALCULATING NATIONAL INCOME BY EXPENDITURE METHOD:-

1) ITEMS WHICH SHOULD BE ADDED:-

A) ONLY FINAL EXPENDITURE ON GOODS AND SERVICES. 

B) EXPENDITURE ON GOODS FOR SELF-CONSUMPTION.

2) ITEMS WHICH SHOULD NOT BE ADDED:-

A) EXPENDITURE ON SECOND HAND GOODS.

B) EXPENDITURE ON SHARES AND BONDS

C) EXPENDITURE ON TRANSFER PAYMENTS LIKE OLD AGE PENSION, SCHOLARSHIPS ETC.



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