What are the Three Methods of National Income Calculation?

Three Methods of National Income Calculation

The three most common approaches are the value-added method, the income method, and the expense method. The following three methods exist for computing national income:

• Income Method
• Product/Value-Added Method
• Expenditure Method

Using the income method, national income is estimated as an inflow of factor income. The four main factors of production are labor, money, land, and enterprise. Wages and salaries are used to compensate for labor, interest is used to compensate for money, rent is used to compensate for land, and profits are used to compensate business enterprises.

National Income Calculation

Using the product/value-added method, national income is calculated as the flow of products and services. We estimate the monetary value of all finished goods and services produced in an economy in a year.

• The phrase “final goods” describes products that are used for immediate consumption rather than for later manufacture.
• National income is determined using the expenditure method as the flow of expenditure.
• The total of all private consumption expenditure is known as Gross Domestic Product (GDP).
• Considerations include government consumption spending, gross (public and private) capital formation, and net exports

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