Introductory Economics

Methods of Calculating National Income

Methods of calculating National Income:
J .M.Keynes, a famous economist defined national income as follows. "National Income is the money value of all goods and services produced in a country during a year"
National income shows the economic position of a nation. The basic objective of an economy is to achieve economic progress which is achieved by coordinating natural, human resources, capital, and technology. National income helps to assess and compare the progress achieved by a country over a period of time. The study of national income is important because it helps to know how far development objectives were achieved in the process of economic development. It also helps to know the contribution of various sectors to national income.

Methods of calculating National Income:
National Income calculation is not an easy task. For this, we have to collect more facts
and figures. Income is generated through production process. Normally we use this income for purchasing goods and services. When demand for commodities goes up, we have to produce more. Thus income leads to expenditure which again leads to increased production as shown below.

The figure above shows how production, income and expenditure are mutually related. Economic activity is directly related to these three stages. Based on this, three methods are used for calculating national income.

1. Production method
2. Income method
3. Expenditure method

1. Production Method:

• This method is based on the total production of a country during a year. First of all production units are classified into primary, secondary and tertiary sectors. Then we identify the various units that come under these sectors. We estimate the goods and services produced in each of these sectors. The sum total of products produced in these three sectors is the total output of the nation. The next step is to find out the value of these products in terms of money. The money sent by Indian citizens working abroad is also added to this to get the gross national income.

GNI = Money value of total goods and services + Income from abroad.

2. Income Method:

• Factors of production together produce output and income. The income received by the factors of production during a year can be obtained by adding rent to land, wages to labour, interest to capital and profit to organizations. This will be equal to the income of the nation. In other words, total income is equal to the reward given to various factors of production. By adding the money sent by the Indian citizens from abroad to the income of the various factors of production, we get the gross national income.

GNI = Rent + Wage + Interest + Profit + Income from abroad.
This method will help us to know the contributions made by different agents like landlords, labourers, capitalists and organizers to national income.

3. Expenditure Method:

• National income can also be calculated by adding up the expenditure incurred for goods and services. Government as well as private individuals spend money for consumption and production purposes. The sum total of expenditure incurred in a country during a year will be equal to national income.

GNI = Individual Expenditure + Government Expenditure.

This method will help us to identify the expenditure incurred by different agents. Any one of the above methods can be used for calculating national income.
Production method = Income method = Expenditure method.

Difficulties Experienced in the Calculation of National Income:
The calculation of the national income of a country is not an easy task; rather it is full of complexities and difficulties of which worth mentioning are as follows:

1. Meaning of nation: Economists in general agree that monetary value of the goods and services produced within the geographical boundaries of a nation is not only the national income but the income derived from abroad should also be included in it.
2. Which goods and services: It is very difficult to find out which goods should be included or excluded from final calculations of national income e.g. whether goods and services having no money value are to be included while calculating national income or not.
3. Double counting: There is always a problem of avoiding double counting in accounting in national income and it is practically difficult to do so.
4. Unreliable statistics: In absence of reliable and com1plete statistics, one cannot find the correct estimate of national income.
5. Existence of barter system: In a country like India if non monetary transactions to a considerable extent are practiced, it is very difficult to have a correct estimate of the national income.
6. Choice of method: We cannot adopt any single method for the computation of national income out-right. In our own country we have to adopt the mixed method for having an estimate of national income.
7. Foreign companies: The existence of foreign companies in an economy also poses the problem of the calculation of national income since a part of the income flows out as dividends.
8. Instability of prices: Frequent changes in the prices in an economy also pose the problem of having the correct estimate of national income.

Importance of the Concept of National Income:
In fact national income is considered to be a unique concept because it is symptomatic of the trend of health and growth of the national economy. The study of national income however, is very useful in. view of the following points:

1. Knowledge of economic conditions: We come to know about the economic conditions of an economy with the help of national income.
2. Various sources of National Income: On the basis of the knowledge of the various sources contributing to national income of a country, we learn about its nature and the level of economic growth.
3. Economic Planning: Planning for growth of economy and its stability is possible only when we know about the economic aggregates which are possible only via national income computation.
4. Standard of Living of the people: With the help of national income data, we come to know about the standard of living of ~ people of that country.
5. Taxable capacity: Taxable capacity of the nation can be measured if we have got an estimate of the National Income of the country.
6. Obstacles to Economic Growth: National income figures give a profile of the difficulties being practically faced in bringing the economy on the path leading to self-reliant economic growth.
7. Trade cycles: Cyclical business fluctuations are common in capitalistic economies where there are changes in economic variables these cycles can be identified and checked with the national income data.
8. Welfare: Modern economies in general are wedded to the philosophy of maximum social welfare for this it is very essential to have an estimate of total consumption in general and particularly of the down trodden classes. National income data serves our purpose from this point of view also.
9. Determination of Grants-in-aid: In the system of federal government the Union or the Central Govt. decides the amount of the grants-in-aid to various states on the basis of their population and contribution to national income.
10. NI and International Organizations: In the international organizations like IMF, IBRD etc. the quota of a member country is determined on the basis of its national income.

National Income calculation in India:

• The first attempt to calculate national income of India was made by Dada Bai Naoroji in 1867-68. This was followed by several other attempts. The first scientific attempt was made by Prof.V.K.R.V.Rao in 1931-32. But it was not a satisfactory attempt. The first official attempt was made by Prof.P.C.Mahalanobis in 1948- 49. The final report was submitted in 1954. Today national income is calculated and published by the Central Statistical Organization. All the three methods are used for calculating national income in India.