Methods of Measuring National Income
The National Income of a country can be measured in three ways.
1. The value Added Method/Output Method
It measures the total value added by each economic activity in the production of country’s annual output of goods and services.
The sum of value added at each stage of production is called as GDP. On to it is added the NIPA (including net profits, rent, dividends etc) to arrive at GNP. Depreciation of country’s stock of capital is deducted form the GNP to give NNP/National Income.
2. The Income Method
It measures the total of incomes (wages and salaries, rent, interests etc) earned by the factors of production used in the production of country’s annual output of goods and services. But, it does not include the transfer payments such as pensions and social security benefits. The sum of factor incomes is called GDP onto it is added the NPIA to arrive at GNP. Depreciation of country’s stock of capital is deducted form the GNP to give NNP/National Income.
3. The Expenditure Method
It measures the total expenditure on the consumption of goods and services.
We spend on Imports and we earn from Exports. Similarly, Taxes raise the value of expenditure and Subsidies reduce the value of expenditure.
Therefore, to reach a correct value measure of GDP;
- reduce the value of Imports
- add the value of Exports
- reduce the value of Taxes and
- add the value of subsidies.
NPIA should be added to GDP to arrive at GNP. Depreciation of country’s stock of capital should be deducted form the GNP to give NNP/National Income.
It is worth noticing that all three methods give the same figure as all three methods measure the same.
Reasons for Measuring the National Income
1. It provides the government with necessary economic information: National Income provides the government with the following information.
- The pattern of national expenditure
- The importance of different sectors of production
- The pattern of income distribution
2. It helps the government in the formulation of National Policies
3. It is used to make international comparisons of living standards
National Income and General Welfare
Changes in the National Income are not always a good indicator of general prosperity.
- Fast population growth might lead to a lower PCI
- Rise in NI does not always reduce the gap between the poor and the rich
- A rise in NI brought about by a higher Inflation does not increase physical output
- NI might be higher due to long hours of work at the expense of leisure
- A rise in NI also increases Social Costs
- The calculation of NI does not include Black Market transactions as they are not recorded.
Per Capita Income
Per Capita Income refers to the Average National Income. PCI = Total National Income / Total population. PCI indicates the country’s general prosperity.
The Per Capita Income expressed in a common currency is the most commonly used indicator in comparing the living standards in different countries.
The following are some problems associated with measuring National Income in terms of PCI.
PCI is an average figure. It does not tell anything about;
- the equality in the distribution of income and wealth
- the types of goods and services produced by the factors of production
- the Social Costs (like pollution) incurred due to economic activities