National Income is the total market value of all final goods and services produced within a country during a specific period, usually one year. There are three specific methods of measuring National Income:
- Output Method (Product Method)
- Income Method (Factor Cost Method)
- Expenditure Method (Outlay Method)
1. Output Method (Product Method)
This method measures National Income by calculating the total value of goods and services produced in different sectors of the economy (Agriculture, Industry, and Services) during a year. It is also known as the Inventory Method.
To avoid double counting, two approaches are used:
- Final Goods Approach: In this approach, only the value of final goods (goods ready for consumption) is considered. The value of intermediate goods (raw materials) is excluded.
- Value Added Approach: This involves summing up the value added at each stage of production. Value added is the difference between the value of output and the cost of intermediate inputs.
2. Income Method (Factor Cost Method)
This method measures National Income from the distribution side. It sums up all the incomes earned by the factors of production (Land, Labor, Capital, and Entrepreneur) for their productive services.
The components of income included are:
- Rent (R): Income from land.
- Wages (W): Compensation to employees/labor.
- Interest (I): Return on capital.
- Profit (P): Reward for entrepreneurship.
- Mixed Income (MI): Income of self-employed individuals.
- Net Income from Abroad (X - M): Difference between exports and imports.
Note: Transfer payments (like pensions, scholarships) and illegal income are excluded.
3. Expenditure Method (Outlay Method)
This method measures National Income by estimating the total expenditure incurred by society on final goods and services during a year. It assumes that income generated is equal to income spent.
The main components are:
- Private Final Consumption Expenditure (C): Spending by households on goods and services (food, clothing, etc.).
- Gross Domestic Private Investment (I): Expenditure by private businesses on capital goods (machinery, construction).
- Government Final Consumption Expenditure (G): Spending by the government on administrative services, law and order, defense, etc.
- Net Foreign Investment / Net Exports (X - M): The difference between earnings from exports (X) and payments for imports (M).
Where (R - P) represents Net Receipts minus Payments from abroad.
Conclusion
While all three methods should theoretically yield the same result, in practice, discrepancies may arise due to data collection errors. Most countries use a combination of these methods to ensure accuracy.
