Production of goods and services gives rise to income, income
gives rise to demand for goods and services, demand gives rise to expenditure,
expenditure gives rise to further production and production gives rise income
again. This circular flow can be shown in figure below;
According to above given circular flow, there
are three methods of measuring national income. They are:
1. Product (output) method
2. Income method
3. Expenditure method
Three alternative methods of measuring
National income are possible. There is triple identifications i.e., Expenditure
= Income = Production in context of national income accounting.
Output /Product method
This method approaches National income from
the output side. The economy is divided into various sectors such as
agriculture, mining, manufacturing, small enterprises, commerce, transport,
communication and other services. If we add up net value added that has taken
place in various productions and industries during a year. In order to arrive
at the net value added of a given industry, the purchase of the producers of
this industry from the gross value of production of that industry. This is
called National income by industrial origin. The method can be used where;
there exists a census of production for the year. In many countries figure of
production of only important industries are available. Hence this method is
used along with other methods to arrive at the National income. The method has
the advantage of revealing the relative importance of the different sectors of
the economy showing their respective contribution to National income.
Rough tabulation representation of GNP, GDP
and NNP by production method
Figures
in Crore
|
|
Agricultural production
|
+100
|
|
|
|
Industrial production
|
+250
|
|
|
|
Services and other
production etc.
|
+150
|
|
|
GDP
|
|
|
500
|
|
|
Net Production from
abroad (X-M)
|
(-50) Or +XXX
|
|
|
GNP
|
|
|
450
|
|
|
Depreciation Funds
|
(-40)
|
|
|
NNP
|
|
|
410
|
Under this method, there are two approaches for measuring
national income. They are:
a.) Final
product method and
b) Value-added
method
(a) Final product method
In this method, national income is estimated by finding the
market value of final goods and services produced in the economy in a
particular time period. Various steps of final product method for measuring
national income are:
Step I:
GDP at MP is calculated by multiplying total quantity of goods and
services (Q) and their respective prices per unit (P) produced in the country
in a year
i.e., GDP at
MP = P x Q
Step II:
GNP at MP is calculated by adding GDP at MP and net factor income from
abroad.
i. e., GNP at MP = GDP at MP +(X-M)
Where, X=
Export Earnings, M= Import Expenditures
Step III:
NNP at MP is calculated by deducting depreciation from GNP at MP.
i. e., NNP at MP=GNP- Depreciation.
Step VI:
NNP at FC or NI is obtained by deducting net indirect taxes.
i.e.; NNP at
FC or NI=NNP at MP - Net indirect taxes.
While calculating national income using final product method,
problem of double counting may be appeared. In order to avoid the double
counting problems, we use value-added method.
(b) Value added
method:
The net product or value added method measures national income
as the sum total of net final output produced or net value added by all the
producing units in an economy during a year. In order to calculate the value at
a particular state of production, the cost of intermediate products is
subtracted from the total value of output i.e.; value-added = Total value of
output – total cost of intermediate
goods. Hence in this method, national income is derived by adding the amount
added in each stage of production of goods and services. The value–added method
is illustrated in the table below.
Value added method
|
Stages
of Production
|
Value
of Output
|
Cost
of intermediate goods
|
Gross
value added
|
|
1. Farmer-grows
wheat and sales to the miller
|
1,000
|
500
|
500
|
|
2. Miller- converts wheat to flour and sales to baker
|
1,500
|
1,000
|
500
|
|
3. Baker – Bakes bread and sales to the super market.
|
2,000
|
1,500
|
500
|
|
4. Supermarket- Sales bread
to consumer
|
2,500
|
2,000
|
500
|
Total value
added output = 7,000
Total cost
of intermediate goods = 5,000
Therefore,
value-added = 7,000-5,000=2,000 is final value.
The sum of the value-added of all
production sectors is gross domestic product (GDP) or total value-added is
equal to GDP. The addition of net income from abroad to total value-added gives
GNP.
Income method
In this method we estimate the income accruing to factors of
production at home and abroad in form of wage income and non-wage income, Wage
income includes wages and salaries including bonus and commission and
supplements to labor incomes. Non-wage income refers to the income paid to the
factors in the form of rent interest and profits. We also add in it the earning
of self employed persons. The sum of these incomes will give us the National
income. It includes following incomes.
1. Wages
and salaries (Including bonus and commission)
2. Interest
3. Supplements
of labor income
4. Earning
of self employed persons
5. Rent
6. Profits:
Corporate profits dividends, undistributed profits, and surplus of public enterpriser
We can give it in
the form of an equation
NI = Wages and
salaries + Supplements to labor income + rant + Income + Direct business taxes
+ net income earned abroad.
The advantage of this method is that it not
only gives National income but also the distribution of National income among
different factors of production.
Rough tabulation representation of GNI, GDI and NNI by Income
method
Figures in Crore
|
|
Wages/salaries/allowances
|
+100
|
|
|
|
Rents
|
+100
|
|
|
|
Interest
|
+150
|
|
|
|
Profits
|
+100
|
|
|
|
Indirect taxes and depreciation,
etc
|
+50
|
|
|
GDI
|
|
|
500
|
|
|
Net income from abroad
(X-M)
|
(-50) Or +XXX
|
|
|
GNI
|
|
|
450
|
|
|
Depreciation Funds
|
(-40)
|
|
|
NNI
|
|
|
410
|
Expenditure method
This method arrives at national income by adding up all the expenditure
made on goods and services during a year. Expend item the following type of
expedition will be know as gross national expenditure (GNE) which is equal to
gross national product (GNP) But we can arrive at National income by deducting
from GNP deprecation and net indirect taxes. In these methods the following
types of expenditure are estimated and added.
1. Private Consumption
expenses.
It consists of all private expenditure on goods (durable consumption
goods and non-durable consumption goods) and services incurved by individual
and non-profit institutional consumes.
2. Current government
consumption expenditure
It consists of expenditure on goods and service. This expenditure
does not include transfer payments.
3. Gross domestic private
investment expenditure
It refers to expenditure on replacement of equipment net addition
to fixed capital inventories and the construction of building factories' etc.
4. Exports minus Imports
(X-M)
This expenditure refers to expedite on national products by foreigners
(exports) minus expenditure on foreign product by national (Imports)
5. Gross Public
Investment expenditure
It includes expenditure
by the government on Investment, Transportations, Infrastructure,
communications, instrument building etc.
We can give it in the form
of an equation.
National income = private
consumption expenditure (C)
+ Gross domestic private investment expenditure (I1)
+ Government consumption expenditure (G)
+ Gross public investment expenditure (I2)
+ Exports - Imports (x - M)
- Depreciation
- Net indirect taxes
Rough tabulation representation of GNE,
GDE and NNE by production method
Figures
in Crore
|
|
Private consumption
expenditure (C)
|
+200
|
|
|
|
Investment expenditure
(I)
|
+150
|
|
|
|
Government expenditure
(G)
|
+150
|
|
|
GDE
|
|
|
500
|
|
|
Net expenditure on abroad
(X-M)
|
(-50) Or +XXX
|
|
|
GNE
|
|
|
450
|
|
|
Depreciation Funds
|
(-40)
|
|
|
NNE
|
|
|
410
|
Difficulties in measuring National Income
Underdeveloped countries like Nepal face numerous difficulties in
arriving at a correct estimate of NI. Some of the major difficulties are the
following
1. The
first difficulty is with regard to the method of measuring the national income;
In fact there is single method for it. The difficulty of 'double counting' in
product method is quite common.
2. The
second difficulty arises with regard to the presence of non-monetary
transaction i.e., transactions, which are not exchange in money. Such
transactions are services rendered by house wives to the members of their
families and goods which are self consumed or bartered out. As well as Illegal
transaction are not included in NI.
3. The
third difficulty relates to the measurements of income earned by foreign firms
or individual in an economy. Should the income earned by them be counted as
a part of the National income of the parent country or should it be added to
the National income of the country in which they are located?
The fourth difficulty is with regard to the availability of
statistical data for the estimation of National income. The available data
National income are both incomplete and unrealities.
Special difficulties in under - developed
economics
4. In
under-developed economics the presence of a large non-monitored sector
serves as the biggest difficulty for National income calculation of the
presence of the monitored sector in an economy. In which most of the goods or
services are exchanged for money. But unfortunately in under-developed
economies the greater part of goods produced is either kept by the producers
for self-consumption or barter. As a result of it a good part of goods and services
are not exchanged with money and hence their value is not added in the National
income.
5. In
under developed economies there is very little of no occupational
specialization. An individual may do many jobs. He may be office servants,
a lecturer, a partner in a business and so on. This he may get income partly
from the office, partly from the
college, partly from the business concern etc. This lack of occupational specialization
presents a serious difficulty in the National income estimates.
6. In
under-developed economies generally the people are illiterate and most
of the producers do not keep any record of the quantity and value of
their output. Neither have they kept any account of their sales. This makes the
task of measuring the National income all the more difficult.
7. The
greatest difficulty in measuring the National income in under development
economics is with regard to the non-availability of adequate statistics,
whatever statistics are available, and they are incomplete and non-reliable.
Most of the statistics are old and collected on the basis of guesswork. 
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