Calculation of National Income | Methods | Steps | Precautions | Class XII |

Calculation of National Income | Methods | Steps | Precautions | Class XII |

 

Value Added Method

This method is also known with the name of product method, output method and inventory method. This method implies the addition in the value of product from producer to the final sale to determine the national income of a country. It is determined by finding the difference between the value of output and the value of intermediate consumption.

The value of output includes the value of sales and change in stock during a year, where Change in Stock = Closing Stock – Opening Stock whereas intermediate consumption includes all the value of raw material which is put into the production.

Value Added (GDPMP) = Value of Output – Intermediate Consumption

(Sales + Change in sock)

Here is an example to understand better

Producer Cost Price Selling Price Value Added Stages of Production
Farmer 20 100 80 Wheat
Miller 100 150 50 Flour
Baker 150 200 50 Biscuits
Total 270 450 180

 

Steps to calculate

  1. First of all, every production is recognized and then categorized into three sectors i.e. Primary, Secondary and Tertiary Sectors.
  2. The gross value of all the sectors at market price is added to get the Gross Domestic Value at Market Price (GDPMP).
  3. To calculate domestic income or Net Domestic Product at Factor Cost (NDPFC), depreciation and net indirect tax is subtracted from GDPMP.

NDPFC = GDPMP – Depreciation – Net Indirect Tax (NIT)

  1. For the calculation of national income or Net National Product at Factor Cost (NNPFC), net factor income from abroad is added in NDPFC to get the value of national income.

NNPFC = NDPFC + NFIA

Precautions to be taken while Calculation

  1. The value of sale and purchase of second hand goods is not taken while estimating national income as it has already been taken when it was first transferred.
  2. Commission earned by an agent is not included as it is a reward for the service render, it does not increase the value of the product.
  3. Usage of own produced goods in production procedure is added as the value of that good can be estimated by taking the market price of that good.
  4. Usage of own produced goods for self-consumption is taken into account while estimating as these goods are like the goods which can be produced for the market and value can be easily estimated.
  5. Value of Intermediate good is not taken while estimating as the value of these goods is already reflected in the value of final goods.
  6. The estimated value of imputed rent is also taken as every house has its rental value.
  7. Service for self-consumption is not included while estimation because it is difficult to estimate the exact amount of service rendered.




Income Method

This method is also called as Factor Payment Method and Distributed Share Method. This method implies the addition of all the factor income which is earned by a person in an accounting year. It is determined by adding the value of Compensation provided to employees, operating surplus and mixed income.

The value compensation of employees includes following:

  1. Wages and Salaries: It refers to all the payment which is received from the employer to all of it employee in return of the employer contract.
  2. Payment in Kind: It refers to all the accommodation given to employees during the period of employment.
  3. Employers’ Contribution to Social Security Scheme: The amount funded by the employer on the behalf of the employee in social security scheme.
  4. Pension on Retirement: The amount received by the employees under works-contract on retirement.

The value Operating Surplus includes following:

  1. Rent: It is the amount received in return of the land provided for production.
  2. Interest: It refers to the amount received for the capital provided in the business.
  3. Profit: It refers to the amount received for providing entrepreneur skills.
  4. Royalty: It refers to the amount received for the use of any brand name.

The term profit includes:

  1.     Dividends: Amount distributed to the shareholders.
  2.     Corporate profit Tax: Amount paid to the government in the form of tax.
  3.     Undistributed Profit: Amount kept in business for further use. It is also named as retained earnings, undistributed profit and corporate saving.

The value of Mixed Income includes all income which is earned from self-employment

Income Method (NDPFC) = Compensation of Employees + Operating surplus + Mixed Income

Steps to Calculate

  1. For the first, all the above mentioned items are added together to get the value of Net Domestic Income at Factor Cost (NDPFC)
  2. For the calculation of national income, Net factor Income from Abroad (NFIA) in NDPFC is added to derive the value of national income (NNPFC) can be derived.

NNPFC = NDPFC + Net Factor Income from Abroad

Precautions to keep in mind while calculation

  1. Transfer income should not be included while estimation as it does not add value in the economy like old-age pension.
  2. Income from illegal activities are also not included because there is no estimation of those income.
  3. Commission and brokerage paid to an agent is not included as it is a reward for the service render.
  4. Income from windfall games are not to be included.
  5. Income from imputed rent of self-occupied space or house should be included.
  6. Value of production for self-consumption should be included.
  7. The direct tax (Income Tax) which is paid out of the compensation of employees should not be included separately as it is already included.




Expenditure Method

This method to calculate national income is also called as Consumption and Investment Method and Income Disposable Method. This methods aggregates all the expenditure in an economy done by households, government, any investment and the value of goods that are exported to other countries.

Expenditure method (GDPMP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation* + Change in Stock + Net Export*

*Gross Domestic Fixed Capital Formation = Business Fixed Investment + Government Fixed Investment + Investment on Residential Construction

NOTE: Gross Domestic Capital Formation = Gross Domestic Fixed Capital Formation + Change in Stock

*Net Export = Export – Import





Steps to Calculate

  1. First all the above expenditures are taken all together to get Gross Domestic Product at Market Price (GDPMP).
  2. To calculate domestic income or Net Domestic Product at Factor Cost (NDPFC), depreciation and net indirect tax is subtracted from GDPMP.

NDPFC = GDPMP – Depreciation – Net Indirect Tax(NIT)

  1. For the calculation of national income or Net National Product at Factor Cost (NNPFC), net factor income from abroad, depreciation and net indirect tax is subtracted from NDPFC to get the value of national income.

NNPFC = NDPFC + NFIA





Precautions regarding this method are as follow:

  1. Expenditure on intermediate goods is not taken into account as the value of final goods is only taken to calculate.
  2. The value of sale and purchase of second hand goods is not taken while estimating national income as it has already been taken when it was first transferred.
  3. Expenditure on shares and bonds are not included as they do not give rise to the production capacity in an economy.
  4. Income from imputed rent of self-occupied space or house should be included.
  5. Transfer income should not be included while estimation as it does not add value in the economy like old-age pension.

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