Measurement of National Income by Value Added Method, Expenditure Method and Income Method
A. Product Method/ Output Method? Value Added Method
Product method or value added method
is that method which measure domestic income by estimating the contribution of
each producing enterprise to production in the domestic territory of the
country in an accounting year.
GVOMP = Sales + ∆ in Stock
where GVOMP = Gross Value of Output at market price
In other wors,
GVOMP = PRICE X OUTPUT + ∆
IN STOCK
GVAMP =
GVOMP – Intermediate Consumption
Note - GVAMP=GDPMP
NVAFC = GVAMP –
Depreciation – Net Indirect Taxes
Value of Output = Sales + Change in
stock
(GVAMP)Value Added = Value
of output – Value of intermediate goods
Precautions in the Estimation of
National Income by Product Method
The following precautions should be
taken while estimating national income by product method -
(i)
The sale and
purchase of old goods and property should not be included in national income.
(ii)
The output of
intermediate goods should not be included in national income.
(iii)
The value of
goods retained for self-consumption should be included in national income.
(iv)
Imputed rent of
owner-occupied buildings should be included in national income.
(v)
Only the value of
final goods should be included in national income.
According to this method, national
income is measured in terms of expenditure on the purchase of final goods and
services produced in the economy during an accounting year. It is also called
consumption and investment method or income disposal method.
Classification of Final Expenditure
a.
Private final consumption expenditure (PFCE)
b.
Government final consumption expenditure
(GFCE)
c.
Gross domestic capital formation (GDCF)
d.
Net exports (NX)
F First we calculate Gross Domestic Product at Market Price
GDAMP= PFCE + GFCE + GDCF + NX
NNPFC = GDAMP – Depreciation + NFIA - NIT
Note
GDCF = Gross domestic fixed capital formation + Change in Stock
Precautions in the Estimation of National Income by Expenditure Method
- To
avoid double counting, expenditure on all intermediate goods and services
is excluded. For example, purchase of eatable items by a restaurant,
expenses on electricity by a factory are not included as they are
intermediate consumption.
- Government
expenditure on all transfer payments such as scholarship, unemployment
allowance, old-age pension etc. is excluded because no productive services
are rendered by the recipients in exchange.
- Expenditure
on second-hand goods is excluded.
- Expenditure
on purchase of old shares/bonds or new shares/bonds etc. are excluded
because it is not payment for goods or services currently produced.
- Imputed
expenditure on own account output should be included.
Income Method
It is also called distributed share
method or factor payment method. According to this method, national income is
measured in terms of factor payments to the owners of factors of production
during an accounting year.
Classification of Factor Incomes
It
is also called distributed share method or factor payment method. According to
this method, national income is measured in terms of factor payments to the
owners of factors of production during an accounting year.
Classification
of Factor Incomes
Compensation
of Employees
(i)
Wages and
salaries in cash – Remuneration in cash includes wages & salaries, DA,
bonus, city compensatory allowance, HRA, leave travelling allowance etc.
(ii)
Payment in kind – includes rent free quarter,
free water and electricity, free uniform, free services of vehicles, amount of
interest on interest-free loans etc.
(iii)
Employers’ contribution to social security
schemes – consists of contribution to life insurance, casualty insurance,
provident fund etc.
(iv)
pension on
retirement
Operating
Surplus –
1.
Rent and Royalty – Rent is a factor income earned from lending the services of
land, building whereas royalty is the income earned by landlord for granting
leasing rights of subsoil assets.
♣ Imputed
Rent – The rent of owner-occupied houses is called imputed rent.
♣ Royalty –
subsoil (deposits of coal, iron, natural gas etc.) and use of patents,
copyrights etc.
2.
Interest – Interest is the price for the funds borrowed.
3.
Profit
Profit
– Dividends, Corporate profit tax and undistributed profit
Profit
– Profit is the residual factor payment to owners of production units. Thus,
profits are the income of the factor input called entrepreneurship for
organizing production and undertaking attendant risks. It is reward that owners
of firms get being in business and taking risk involved therein.
Corporate
(Profit) Tax – The net profit of a corporate enterprise is used mainly for
three purposes –
(i)
corporate
tax,
(ii)
dividend and
(iii)
Reserve fund (undistributed profit).
Mixed
Income from self-employed (MISE) – Income of own account workers like farmers,
doctors, barbers etc. and unincorporated enterprises like small shopkeepers,
repair shops, retail traders etc is known as mixed income.
Net
Factor Income from Abroad (NFIA)
NDPFC = COE + OS + MISE
NNPFC =
Precautions
of income method
- Transfer earnings like old-age pensions,
unemployment allowance etc. should not be included in national income.
- Income from illegal activities like theft
and gambling is not included in national income.
- Commission paid on the sale and purchase
of second hand goods are to be included in national income.
- Brokerage on the sale/purchase of shares
and bonds is to be included in national income.
- Income in terms of windfall gains should
not be included in national income.
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