Measurement of National Income – Various Methods of Measuring National Income

By Balaji

Updated on: February 17th, 2023

The Measurement of National Income means the principle and methods used by the Indian government to measure the production and income of the country, i.e., the economic activity of India in a given period of time. Measurement of National Income in India is done by three methods, i.e., Income Method, Production Method, and Expenditure Method.

The National Income in India is measured by the Central Statistics Office under the Ministry of Statistics and Programme Implementation. Below you will learn what National income is, the measurement of national income, methods of measuring national income, its estimation in India, and the importance of estimating the national income.

Table of content

  • 1. What is National Income? (more)
  • 2. Measurement of National Income (more)
  • 3. Estimation of National Income in India (more)
  • 4. Objectives of Measurement of National Income (more)
  • 5. Importance of National Income Accounting (more)
  • 6. Issues related to Methods of Measuring National Income (more)
  • 7. Measurement of National Income UPSC (more)

What is National Income?

National Income is defined as the sum total of the monetary value of all final goods and services produced in a country, i.e., the incomes earned by the citizens of the country in a particular period (generally, one year). The measurement of national income is realized by different methods.

There are 5 measures of the national income, and these measures are GDP (Gross Domestic Product), GNP (Gross National Product), NNP (Net National Product), P.I. (Personal Income), and DPI (Disposable Personal Income).

  • GDP (Gross Domestic Product): The total monetary value of all final goods and services provided or manufactured within the geographical demarcation of the country during a particular period (Generally one year). In GDP, we consider all goods/ services produced by both resident citizens and foreign nationals who reside in India and the income of Indians abroad are excluded.
  • GNP (Gross National Product): The net value of the final commodities and services produced by Indians in India and abroad during a particular period. GNP includes the value of goods produced by resident and non-resident citizens of a country, whereas the income of foreigners who reside in India is excluded.
  • Net National Product (NNP): It is calculated by deducting depreciation from Gross National Product (GNP), i.e., NNP = GNP – Depreciation.
  • Personal income (P.I.): The sum of all the income received by the people of the country in one year. Personal Income = National Income – (Undistributed Corporate Profits+ Corporate Taxes + Social Security Contribution) + (Transfer Payments). Transfer Payments are payments that are not against any productive work. (Example- Old Age Pension, Unemployment compensation etc.).
  • Disposable Personal Income (DPI): Income available to individuals after deducting direct taxes. Disposable Personal Income = Personal Income – Direct Taxes.

Measurement of National Income

This topic forms an essential segment of the UPSC syllabus. Check the complete details of the methods for measurement of national income and helpful they are in tracking economic development. Three methods of measuring national income are given below-

  • Income Method
  • Production (Value-Added) Method
  • Expenditure Method

Income Method of Calculating National Income

The National income is made conclusion by estimating by adding the mixed income of self-employed and all the production factors like profit, interest, wages, rents, etc. Almost 1/3rd of the Indian population is self-employed. Thus, the self-employed income is considered the domestic income, which is related to production within the country’s border. This is one the method used for the measurement of national income.

The income method is also known as the Factor Income method, which includes adding the trading surplus of the public sector corporations and undistributed benefits of the private actor.

Production Method of National Income

According to the Production Method, the National income is made conclusion by estimating the value added by all the firms. The value added is equal to the difference between the Value of Output and the Value of (non-factor) inputs. The production method gives the Gross Domestic Product at the Market Price. This is considered one of the best method for the measurement of national income.

To calculate the National Income,

  • Add Net Factor Income from Abroad: GNP at M.P. = GDP at M.P. + NFIA
  • Subtract Depreciation: NNP at M.P. = GNP at M.P. – Dep
  • Subtract Net Indirect Taxes: NNP at F.C. = NNP at M.P. – NIT

Expenditure Method of Measuring National Income

The expenditure method is used to measure the domestic economic expenditure and consists of two elements, i.e., Investment expenditure and Consumption expenditure. According to the expenditure, the method to measure national income by:

Y= C + I + G + (X – M)

Here, X – M = Net Exports, X = Exports, M = Imports, I = Investment or Capital Formation, G = Govt’s expenditure on final consumer goods, C = Private Sector’s Expenditure on final consumer goods, and Y = GDP at M.P.

The investment expenditure is the expenditure on the construction of fixed capital like buildings, machinery, etc., while the Consumption expenditure includes goods and services.

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Estimation of National Income in India

In 1868, Dadabhai Naoroji wrote a book ‘Poverty and Un British Rule in India.’ It was the first attempt at the calculation of National Income. The first person to estimate National Income scientifically was Dr. V. K. R. V. Rao, who estimated national income for 1925-29. After Independence, the National Income committee was formed in 1949 under the chairmanship of P.C. Mahalanobis. And Central Statistical Organisation (CSO) was formed after some years.

Also, check the Limitations of Average Income and Per Capita Income

Objectives of Measurement of National Income

The measurement of national income solves numerous objectives. It is a major factor that determines the economic development of a country. It also lays forth the comparison of the national income between different countries.

  • It keeps a track of the economic growth of other countries.
  • It assists the government in laying forth plans and strategies for accomplishing different goals and developing plans for projects.
  • It also figures out the advantages and disadvantages associated with the economic activities pertaining to consumption and distribution.

Importance of National Income Accounting

Measurement of National income gives a clear idea of the country’s economy. It helps the government to form new policies and to come up with better economic models for planning the economic model of the country. The significance of National Income Accounting is explained as follows-

  • For the Economy: In regard to economic accounting, the National Income data is considered an important tool as it depicts the output and product results from an individual’s income, international trade transactions, and industrial products.
  • National Policies: These form the basis for forming national policies. It helps in knowing the direction of the investment and the output of these policies, which will help in changing the policies and coming up with proper measures for a stable economy.
  • Economic Planning: Knowing the data of the gross income, output, savings, and consumption of the different sources is important for economic planning.
  • Research: The data collected by the Ministry of Statistics and Programme Implementation is used by economics scholars to conduct research.
  • Economic Models: Economists come up with long-run and short-run economic and investment models using the data of the national income.
  • Per Capita Income: Calculation of National Income is essential for calculating the per capita income of the country. The greater value of Per capita income, the greater the country’s economic welfare.

Issues related to Methods of Measuring National Income

The problems related to the different methods used for National Income Accounting in India include the following-

  • Problems in Income Method involve Owner-occupied houses, self-employed persons, goods meant for Self-consumption, and wages and salaries paid in kind.
  • Problems in Product Method involve services of housewives, Intermediate and Final Goods, Second-hand goods assets, illegal activities, consumer services, capital gains, inventory changes, depreciation, price changes, etc.
  • Problems in Expenditure Method involve Government services, transfer payments, durable use of Consumers’ goods, and public expenditure.

Measurement of National Income UPSC

The National Income indicates the economic status of the country and depicts its economic growth. Thus, the measurement of National Income UPSC stands as an important topic as several questions have been asked in the UPSC Prelims and Mains exam under the Indian Economy Section. The candidates must prepare well for the topics to get a hold of the concepts and fundamentals. You can learn about the related topics by going through the Economy Notes for UPSC.

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