Methods of Measuring National Income
There are three methods of measuring national income.
1) The output method/Product method
2) The income method
3) The expenditure method.
1) Output Method:
This method of measuring national income is also known as product method or inventory method. This method approaches national income from the output side. According to this method, the economy is divided into different. sectors, such as agriculture, mining, manufacturing, small enterprises, commerce, transport; communication and other services. The, output or product method is followed either by valuing all the final goods and services, produced during a year, at their market price or by adding up all the values at each higher stage of production, until these products are turned into final products.
While using this method utmost care must be taken to avoid multiple or double counting. To avoid double counting this method suggests two alternative approaches for the measurement of GNP
i) The Final Goods Approach / The Final Product Approach:
Final goods are those goods which are ready for final consumption. According to this approach value of all final goods and services produced in primary, secondary and tertiary sector are included and the value of all intermediate transactions are ignored. Intermediate goods are involved in the process of producing final goods, that is, the final flow of output purchased by consumers. Hence, the value of final output includes the value of intermediate products.
For example, the price of bread includes, the cost of wheat, making of flour, etc., wheat and flour are both intermediate goods. Their values are paid up during the process of production. In the value of the final product, bread, the values of intermediate goods are already included.
Thus, a separate accounting of the values of intermediate goods, along with the accounting of the value of final product, would mean double counting. To avoid this, the value of only the final product must be computed.
ii) The Value Added Approach / The value Added Method:
In order to avoid double counting value added approach is used. According to this approach, the value added at each stage of the production process is included. The difference between the value of final outputs and inputs, at each stage of production is called the value added. Thus, GNP is obtained as the sum total of the values added by all the different, stages of the production process, till the final output is reached in the hands of consumers, to meet the final demand. This can be illustrated with the help of the following table.
Table No. 8.1 – Value Added Method
Production Stages
|
Value of Output (`)
|
Value of Input (`)
|
Value Added (`)
|
Wheat (Farmer)
|
700
|
0
|
700
|
Flour (Flour mill)
|
1000
|
1000
|
300
|
Bread (Baker)
|
1300
|
1000
|
300
|
Retailer (Merchant)
|
1400
|
1300
|
100
|
Total Value
|
1400
|
Here, we have assumed a much simplified model of an economy, producing only a single final product, bread. It is assumed, that there are four productive stages in production of bread.
In the given example farmer produces and sells wheat for ` 700/- to the miller. Miller sells flour for ` 1000/- to the baker. Baker sells bread for ` 1300/- to the retailer/merchant. Retailer sells bread for ` 1400/- to the consumers. So the value added by farmer (` 700), miller (` 300), baker (` 300) and retailer (` 100) that is, total of ` 1400 should be included in the national income.
To avoid double counting, either the value of final output or the sum of value added should be taken in the estimate of GNP.
Precautions:
While estimating national income by output method, the following precautions should be taken:
1) To avoid double counting, only the value of final goods and services must be taken into account.
2) Goods used for self consumption by farmers should be estimated by a guess work that, is imputed value of goods produced for self consumption, is included in national income.
3) Indirect taxes included in the market prices are to be deducted and subsidies given by the government to certain products should be added for accurate estimation of national income.
4) While evaluating output, changes in the price level between different years must be taken into account.
5 ) Value of exports should be added. and value of imports should be deducted.
6) Depreciation of capital-assets should be deducted.
7) Sale and purchase of secondhand goods should be ignored as it is not a part of current production. The output method is widely used in the underdeveloped countries. However, it is less reliable because of the margin of error. In India, this method is applied to agriculture, mining and manufacturers, including handicrafts. But it is not applied for transport, commerce and communication sectors in India.
