METHODS OF CALCULATING NATIONAL INCOME
- Value-added method
- Expenditure method
- Income method
- In India, The Central Statistics Office (CSO) calculates India’s GDP. It comes under the Ministry of Statistics and Program Implementation (MOSPI). It gathers data and maintains statistical records.
- On May 23, the government announced that the National Sample Survey Office (NSSO) will be merged with the Central Statistics Office to form the National Statistical Office (NSO).
- The expenditure method has the capacity to calculate illegal income.
- In 1999 national income from the expenditure method was 10 times more than the income method.
VALUE ADDED METHOD
- Value-added means the addition of value-added to raw material by the firm by productive activities.
- The value-added method gives GVAMP and the sum of GVAMP of all the sectors gives GDPMP.
- The value-added method is also known as product method, inventory method, net output method, industrial origin method, commodity service method.
Value added or GVAMP = value of output – intermediate consumption
- Intermediate consumption refers to the value of input used by a firm to produce goods and services. Also known as the purchase of raw material.
Intermediate consumption= domestic purchase+ imports+ any other charge or expenditure made by firm during production
- Value of output refers to market value of goods and services produced during a period of one year.
Value of output= sales+ change in stock+ drawings of the product
Value of output= (quantity × price) + change in stock
- Sales refers to total units sold by firm in a year.
Sales= sales A + sales B + sales C ……. + domestic sales + exports
- Drawings refer to products used by producers from production for self-consumption.
- Change in stock refers to the difference between closing and opening stock.
Change in stock= closing stock- opening stock
PRECATIONS OF VALUE ADDED METHOD
- INTERMEDIATE GOODS ARE NOT INCLUDED IN NATIONAL INCOME: the value of intermediate goods is already included in the value of final goods. If they are included again, it will lead to the problem of double counting.
- SALES AND PURCHASE OF SECOND-HAND GOODS IS NOT INCLUDED IN NATIONAL INCOME: value of these goods were included in the year they were produce.
- BROKERAGE OR COMMISSION ON SALES OF SECOND-HAND GOOD IS INCLUDED IN NATIONAL INCOME
- PRODUCTION OF SERVICES FOR SELF-CONSUMPTION IS NOT INCLUDED IN NATIONAL INCOME: domestic services like service of homemade, kitchen gardening, etc. are not included in national income is it is difficult to measure their market value. Services of maid, driver, private tutors, etc. are included in national income.
- PRODUCTION OF GOODS AND SERVICES FOR SELF-CONSUMPTION IS INCLUDED IN NATIONAL INCOME: as they contribute to current output.
- IMPUTED VALUE OF OWNER-OCCUPIED HOUSES IS INCLUDED IN NATIONAL INCOME
- CHANGE IN INVENTORY IS INCLUDED IN NATIONAL INCOME
DOUBLE COUNTING: it refers counting of an output more than once while calculating national income.
HOW TO PREVENT PROBLEM OF DOUBLE COUNTING?
- Final output method: the only value of final goods should be added to determine national income.
- Value-added method: sum of value added by each productive unit should be taken while estimating national income.
- According to this method, all the income generated through the factor of production( rent, wages, profit, and interest ) is summed to get national income.
- It gives NDPFC.
- System of national accounts (SNA) 1993 elaborated components of income method.
- This method is also known as the distributive share method and factor payment method.
COMPONENTS OF INCOME METHOD
- Compensation/emoluments of employees (COE): it refers to the payment made to employees by an employer for rendering factor services. Elements of COE are as follows:
- WAGES AND SALARIES IN CASH: it includes all the momentary benefits like wages, salaries, bonus, allowance, direct deposits at employees account, etc.
- WAGES AND SALARIES IN-KIND: it refers to non-momentary benefits. These facilities are generally given to employees of top posts. Eg. Free or discounted medical and educational facilities, rent-free homes, discounted possession of the house, etc.
- EMPLOYER’S CONTRIBUTION TO SOCIAL SECURITY SCHEMES: like gratuity, provident funds, labor welfare funds, etc. such contributions are aimed to ensure the security of life of employees. ANY CONTRIBUTION OF 3RD PARTY IS NOT CONSIDERED IN NATIONAL INCOME. EMPLOYEES CONTRIBUTION TO SOCIAL SECURITY SCHEME IS NOT CONSIDERED IN NATIONAL INCOME.
Compensation of employees = wages and salaries in cash + wages and salaries in kind + employer’s contribution to social security schemes
- RENT AND ROYALTY: rent is a type of income that arises from ownership of property. Royalty refers to income received for granting leasing rights of subsoil assets. Examples, crore, iron ore, natural gas, etc.
- INTEREST: it refers to the amount received for lending funds to productive units. INTEREST INCOME INCLUDED INTEREST ON LOANS TAKEN FOR PRODUCTIVE SERVICES ONLY.
- PROFIT: it refers to a reward to the entrepreneur for his/her contribution to the production of goods and services. Elements of profit are as follows:
- CORPORATE TAX/PROFIT TAX/BUSINESS TAX: it is direct tax paid by an enterprise to the government on the total profit earned by it.
- DIVIDEND/DISTRIBUTED PROFIT: part of profit paid to shareholders.
- RETAINED EARNINGS/UNDISTRIBUTED PROFIT/SAVINGS OF PRIVATE SECTOR/RESERVES AND SURPLUS: it is part of the profit that is kept as reserves to meet unexpected contingencies.
Profit= corporate tax + dividend + retained earnings
- MIXED INCOME: income generated by own account workers or self-employed.
OPERATING SURPLUS: it refers to sum of income from property and entrepreneurship.
Operating surplus = rent and royalty + interest + profit
Income method (NDPfc) = compensation of employees + rent and royalty + interest + profit + mixed income
Income method (NDPfc) = compensation of employees + operating surplus + mixed income
PRECAUTIONS OF INCOME METHOD
- TRANSFER INCOME ARE NOT INCLUDED WHILE CALCULATING NATIONAL INCOME: as such incomes are not connected to any productive activities.
- INCOME FROM SALES OF SHARES, BONDS, AND DEBENTURE IS NOT INCLUDED IN NATIONAL INCOME: as such transactions do not contribute to the current flow of goods and services.
- CAPITAL GAINS ARE NOT INCLUDED IN NATIONAL INCOME
- INTEREST PAID BY GOVERNMENT ON PUBLIC DEBT IS NOT INCLUDED IN NATIONAL INCOME
- INTEREST PAID BY CONSUMERS IS NOT INCLUDED IN NATIONAL INCOME: as such interest is on loans for consumption purposes.
- INTEREST PAID BY ONE FIRM TO ANOTHER FIRM IS NOT INCLUDED IN NATIONAL INCOME
- WINDFALL GAINS ARE NOT INCLUDED IN NATIONAL INCOME: like horse race are not included as there is no productive services.
- IMPUTED VALUE OF SERVICES PROVIDED BY OWNERS OF PRODUCTION UNITS WILL BE INCLUDED: the imputed value of owner-occupied houses, interest on own capital, production for self-consumption, etc. will be included in national income as these are productive activities and add to the flow of goods and services.
- PAYMENT OUT OF PAST SAVINGS ARE NOT INCLUDED IN NATIONAL INCOME: as they are paid out of wealth and do not contribute to current flow of goods and services.
- This method measures national income as the sum of final expenditure incurred by households, business firms, government, and foreigners.
- It gives GDPMP.
- This method is also known as the income disposable method.
COMPONENTS OF EXPENDITURE METHOD
- PRIVATE FINAL CONSUMPTION EXPENDITURE (PFCE): expenditure incurred by household and non-profit organizations.
- GOVERNMENT FINAL CONSUMPTION EXPENDITURE (GFCE): refers to expenditure incurred by the government on various administrative services like law & order, defense, education, etc.
Government final consumption expenditure = intermediate consumption of government + compensation of employees paid by government + direct purchase from abroad for embassies and consulates located abroad – sales of goods and services produced by government
- GROSS DOMESTIC CAPITAL FORMATION (GDFC) OR GROSS INVESTMENT: refers to the addition to the capital stock of an economy. Elements of GDFC are as follows:
- GROSS FIXED CAPITAL FORMATION: expenditure incurred on the purchase of fixed assets. Elements of gross fixed capital formation are as follows:
- GROSS BUSINESS FIXED INVESTMENT: refers to expenditure on purchase of new plant, machinery, equipment, etc.
- GROSS RESIDENTIAL CONSTRUCTION INVESTMENT: it includes expenditure on the purchase or construction of new houses by households.
- GROSS PUBLIC INVESTMENT: it includes the construction of flyovers, roads, bridges, etc. by the government.
Gross fixed capital formation = gross business fixed investment + gross residential construction investment + gross public investment
- INVENTORY INVESTMENT (CHANGE IN STOCK): it refers to the physical change in the stock of raw material, semi-finished goods lying with the producers.
- NET EXPORTS (X-M): it refers to the difference between exports and imports of a country during a period of 1 year.
Expenditure method (GDPMP): Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports (X-M)
PRECAUTIONS OF EXPENDITURE METHOD
- EXPENDITURE ON INTERMEDIATE CONSUMPTION WILL NOT BE INCLUDED IN NATIONAL INCOME
- TRANSFER PAYMENTS ARE NOT INCLUDED IN NATIONAL INCOME
- PURCHASE OF SECOND-HAND GOODS WILL NOT BE INCLUDED IN NATIONAL INCOME
- PURCHASE OF FINANCIAL ASSETS WILL NOT BE INCLUDED IN NATIONAL INCOME
- EXPENDITURE ON OWN ACCOUNT PRODUCTION IS INCLUDED IN NATIONAL INCOME: expenditure on production of goods and services for self-consumption is included in national income as they contribute to the current flow of goods and services.