Approaches to measure national income. Three Approaches to measuring National Income 2019-01-12
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Essay on Explain 3 Ways of Measuring National Income of a Country
However, in an open economy having foreign trade, adjustments will have to be made for imports and exports. There is often no sector by sector breakdown, variations and linkages among components exist, it is difficult to measure and some of the measures can only be guesswork. Normally this period consists of one year duration, as a year is neither too short nor long a period. From the data pertaining to wages, rent, interest and profits, we learn of the disparities in the incomes of different sections of the society. Here bread is the final product and what and Blur is intermediate products.
In order to protect such producers, the government helps them by granting monetary help in the form of a subsidy equal to the difference between the market price and the cost of production of the commodity. Two adjustments must be made. However, the nominal value has only risen because of inflation, so to adjust the nominal value to find the real value we take the constant price of £1 — which is the price of pens at the start of our measurement in the base year, year 1. If the farmer were to sell his entire produce in the market, he will have to buy what he needs for self-consumption out of his money income. This concept is based on the assumption that national income equals national expenditure.
The Income Approach and the Expenditure Approach to Measuring the GDP of a Nation
If the prices of what starting from the cultivation to the final product are added the price of bread will be many times more of the actual price of bread. But, it represents no increase in real output. It is easier to use a round year figure for calculation of the growth rates i. This is done by holding prices constant from a starting measure, called the base year. This includes wages from employment and self-employment, profits to firms, interest to lenders of capital and rents to owners of land.
The Income Approach This approach uses the total flow of income earned from production of goods and services in a current period of time. However, all such expenses including the salaries of armed personnel are included in national income. They are as follows: 1. Then the gross national income is Rs. Stock appreciation: Item number 8 involves stocks and its appreciation. This concept enables us to know the average income and the standard of living of the people. Double counting means the counting of the value of goods and services at more than one stage i.
Income approach to measurement of national income is shown through bar diagrams in Figure 2. This is nothing but net domestic product at market prices. Operating surplus Corporate Income It includes rent, profit and interest. Net Factor Property Income from Abroad: It is also to be noted that some of the income derived from economic activity within the country will be paid to foreign owners of assets located in India, while income from Indian-owned assets abroad will be moving in the opposite direction. The recession lasted until the fourth quarter of 2009. But expenditure method is difficult method because of the reliability of data. A greatest difficulty in the measurement of national income in the developing countries is general lack of adequate statistical data.
Out of this value added, the major portion goes in the form wages and salaries, rent, interest and profits, a small portion goes to the government as indirect taxes and the remaining amount is meant for depreciation. This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, owners of capital, workers, entrepreneurs. National income accounting is not a set of accounting rules per se; rather it is a set of methods for collecting data. First, the farmer produces the wheat and sells it to the floor mill. Intermediate consumption which is the value of goods such as raw materials, fuels purchased from other firms 2.
In this case, national income is greater than domestic income. The difference between export and import are also included in the national income. Likewise, the profits of public sector state enterprises are appropriated by the government and not by persons. These are low cost, high volume, low priced products. The impetus for that major statistical effort was the and the rise of , which prescribed a greater role for the government in managing an economy, and made it necessary for governments to obtain accurate information so that their interventions into the economy could proceed as well-informed as possible. Government Expenditure: Money that government spends falls into two categories, one is called transfer payments.
3 Alternative Methods Used for Measuring National Income
The total output of the economy is the sum of the outputs of every industry. Expenditure approach to national income is shown through bar diagram in Table 2. They may not leave the business premises, expenditure on them will be a part of the final expenditure. However the terms are used loosely. Stock Adjustment and Capital Gains and Losses: Finally, stock appreciation adjustment has to be made in order to eliminate the element of windfall gain in the profits received. To this is added, the estimated interest on that private capital which is invested and not borrowed by the businessman in his personal business. When a teacher teaches his own children, his work is also not included in national income.
This is illustrated in Table 2. Such second-hand transactions are called transfers. It comprises expenses on durable goods like watch, bicycle, radio, etc. Sale and purchase of second-hand goods should not be included in measuring value of output of a year because their values were counted in the year of output of the year of their production. Without these, planning is not possible. In our example, tyres and tubes, glass, steel, electricity were all intermediate goods used at various stages in the production process while cars were final goods.
What are the three methods of measuring national income?
National expenditure is recorded at market prices. Income Method of Measure National Income Factors of production participate in economic activity to produce goods and services, the factors are compensated for the productive services rendered to the economy. Income equal to the value of production used for self-consumption should be estimated and included in the measure of national income. Consumption: Consumption expenditure refers to all purchases by households of curÂrently produced goods and services, except new houses which are counted as investment. In practice, while estimating national income, any of these three definitions may be adopted, because the same national income would be derived, if different items were correctly included in the estimate.
