MEASUREMENT OF NATIONAL INCOME

MEASUREMENT OF NATIONAL INCOME

PRODUCTMETHOD

INCOMEMETHOD

EXPENDITUREMETHOD

PRODUCT METHOD

This method approaches National Income from Production side.

Here National Income is the total value of production in a year.

When we use Production Method, the value of output can be estimated by three ways.

1. Final goods approachHere we add together the value of only all final goods and

services produced in an economy in a year. This can be achieved by multiplying quantity with its market price.

PRODUCT METHOD

Symbolical ly,

Double counting is avoided in this method because of taking only final goods.

(But how to differentiate Final goods and Intermediate goods is a question stil l unsolved)

PRODUCT METHOD

When output of a good or service is added more than once in calculation of National

Income, it is cal led Double Counting.

2. Value added approach :

Here the value generated and added by each firm in the process of production is added together to get the values of production. From the total production

value of a firm, the value of intermediates excluded. (This is to avoid double counting).

PRODUCT METHOD

Value added = Value of output - intermediate consumption

Gross Value Added = Gross Value of Output (Q) Value of –

Intermediate Consumption (Z)

The use of intermediate goods of a firm purchased from other firm is cal led

intermediate consumption

Net Value Added = Gross Value of added Consumption–

of fixed capital or Depreciation

The Gross Value Added of a firm during a year can be calculated in two ways:

Gross Value Added of Firm i (GVAi) Gross ≡

Value of the output produced by the firm i (Qi) –

Value of intermediate goods used by firm i (Zi)

GVAi Value of sales by the firm i ≡ (V

i) +

Value of change in inventories of firm i (Ai)

- Value of intermediate goods used by the firm i (Z

i)

1

2

As per Value Added Method. GDP is the sum of Gross Values Added by al l the Producers in the

domestic territory of an economy during a year. If there are N firms,

it can be written as :

Now we can write it as

NVAi is the Net Value Added of the firm i and D

i is

the Depreciation of firm i. If so,

If there are N firms, then

It shows that GDP is the sum total of the Net Values added and Depreciation by al l the firms in an economy .

Net Domestic Product (NDP) Is the sum of the Net Values Added by al l firms in the Economy.

3. Sale approach:

Al l produced outputs are not sold by a firm in the same year. Hence, here we approach from the side of

sales and not production.

PRODUCT METHOD

Value of output = Value of sales + Value of change in inventories

Value of sales = output sold x priceChange in inventories =

Closing stock Opening stock.–