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SSC Economic Study Material – National Income

SSC Economic Study Material – National Income

SSC Economic Study Material – National Income

INTRODUCTION-

The national income and product accounts (NIPAs) produced by the Bureau of Economic Analysis (BEA) have become a mainstay of modern macroeconomic analysis for the U.S. economy. In fact, the Commerce Department in 2000 named the NIPAs, and their marquee measure, gross domestic product (GDP), “its achievement of the century.” Because these accounts provide a detailed picture of economic activity at a given time, as well as a consistently defined series of measures over time, they are indispensable to researchers, forecasters, government officials, academics, and investors who use them for a wide array of academic, public policy, and other purposes.

Given the importance of the NIPAs, users often seek a detailed explanation of the concepts that underlie them. The goal of this methodology paper is to present the conceptual basis and framework of the U.S. NIPAs.  Specifically, the paper demonstrates how the seven accounts that summarize the NIPAs are derived from conventional accounting statements—in particular, the balance sheet, income statements, and the statement of cash flow familiar to business accounting.

National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country.

In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.

SSC CGL Economic Study Material
DEFINITION-

The definitions of national income can be grouped into two classes: One, the traditional definitions advanced by Marshall, Pigou and Fisher; and two, modern definitions.

According to Marshall: “The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or national dividend.” In this definition, the word ‘net’ refers to deductions from the gross national income in respect of depreciation and wearing out of machines. And to this, must be added income from abroad.

It’s Defects:

Though the definition advanced by Marshall is simple and comprehensive, yet it suffers from a number of limitations. First, in the present day world, so varied and numerous are the goods and services produced that it is very difficult to have a correct estimation of them.

Consequently, the national income cannot be calculated correctly. Second, there always exists the fear of the mistake of double counting, and hence the national income cannot be correctly estimated. Double counting means that a particular commodity or service like raw material or labour, etc. might get included in the national income twice or more than twice.

The Pigouvian Definition:

A.C. Pigou has in his definition of national income included that income which can be measured in terms of money.

In the words of Pigou, “National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money.”

This definition is better than the Marshallian definition. It has proved to be more practical also. While calculating the national income now-a- days, estimates are prepared in accordance with the two criteria laid down in this definition.

First, avoiding double counting, the goods and services which can be measured in money are included in national income. Second, income received on account of investment in foreign countries is included in national income.

It’s Defects:

The Pigouvian definition is precise, simple and practical but it is not free from criticism. First, in the light of the definition put forth by Pigou, we have to unnecessarily differentiate between commodities which can and which cannot be exchanged for money.

But, in actuality, there is no difference in the fundamental forms of such commodities, no matter they can be exchanged for money. Second, according to this definition when only such commodities as can be exchanged for money are included in estimation of national income, the national income cannot be correctly measured.

According to Pigou, a woman’s services as a nurse would be included in national income but excluded when she worked in the home to look after her children because she did not receive any salary for it. Similarly, Pigou is of the view that if a man marries his lady secretary, the national income diminishes as he has no longer to pay for her services.

Fisher’s Definition:

Fisher adopted ‘consumption’ as the criterion of national income whereas Marshall and Pigou regarded it to be production.

According to Fisher, “The National dividend or income consists solely of services as received by ultimate consumers, whether from their material or from the human environments. Thus, a piano, or an overcoat made for me this year is not a part of this year’s income, but an addition to the capital. Only the services rendered to me during this year by these things are income.”

Fisher’s definition is considered to be better than that of Marshall or Pigou, because Fisher’s definition provides an adequate concept of economic welfare which is dependent on consumption and consumption represents our standard of living.

It’s Defects:

But from the practical point of view, this definition is less useful, because there are certain difficulties in measuring the goods and services in terms of money. First, it is more difficult to estimate the money value of net consumption than that of net production.

In one country there are several individuals who consume a particular good and that too at different places and, therefore, it is very difficult to estimate their total consumption in terms of money. Second, certain consumption goods are durable and last for many years.

If we consider the example of piano or overcoat, as given by Fisher, only the services rendered for use during one year by them will be included in income. If an overcoat costs Rs. 100 and lasts for ten years, Fisher will take into account only Rs. 100 as national income during one year, whereas Marshall and Pigou will include Rs. 100 in the national income for the year, when it is made.

Modern Definitions:

From the modern point of view, Simon Kuznets has defined national income as “the net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers.”

On the other hand, in one of the reports of United Nations, national income has been defined on the basis of the systems of estimating national income, as net national product, as addition to the shares of different factors, and as net national expenditure in a country in a year’s time. In practice, while estimating national income, any of these three definitions may be adopted, because the same national income would be derived, if different items were correctly included in the estimate.

Aims and Objectives

  1. a) i) To provide or undertake activities aimed to achieve population stabilisation, at a level consistent with the needs of sustainable economic growth, social development and environment protection, by 2045.
  2. ii) To promote and support schemes, programmes, projects and initiatives for meeting the unmet needs for contraception and reproductive and child health care.

iii)  To promote and support innovative ideas in the Government, private and voluntary sector with a view to achieve the objectives of the National Population Policy 2000.

  1. iv) To facilitate the development of a vigorous people’s movement in favour of the national effort for population stabilisation.
  2. v) To provide a window for canalizing contributions from individuals, trade organizations and other within the country and outside, in furtherance of the national cause of population stabilisation.
  3. b) There shall be no discrimination on the ground of religion, community, caste or class.

Concepts of national income

(1) Gross  Domestic  Product  (GDP)  : Gross  domestic  product  is  the  money  value  of  all  final goods  and  services  produced  in  the  domestic  territory  of  a  country  during  an  accounting year. The concept of domestic territory has a special meaning in national income accounting. Domestic territory  is  defined  to  include  the  following:

(i) Territory lying within the political frontiers, including territorial waters of the country.

(ii) Ships and aircrafts operated by the residents of the country between two or more countries.

(iii) Fishing  vessels,  oil  and  natural  gas  rigs,  and  floating  platforms  operated  by  the residents  of  the  country  in  the  international  waters  or  engaged  in  extraction  in  areas in  which  the  country  has  exclusive  rights  of  exploitation.

(iv)  Embassies,  consulates  and  military  establishments  of  the  country  located  abroad.

(2) GDP  at  Constant  Prices  and  at  Current  Prices  : GDP  can  be  estimated  at  current  prices and  at  constant  prices.  If  the  domestic  product  is  estimated  on  the  basis  of  the  prevailing prices it is called gross domestic product at current prices. Thus, when we say that GDP of India  at  current  prices  in  2010-11  is  72,66,967  crores,  we  are  measuring  GDP  on  the basis  of  the  prices  prevailing  in  2010-11.  On  the  other  hand,  if  GDP  is  measured  on  the basis of some fixed prices, that is prices prevailing at a point of time or in some base year

it  is  known  as  GDP  at  constant  prices  or  real  gross  domestic  product.  Thus  when  we  say that  GDP  in  2010-11  is 49,37,006  crores  at  2004-05  prices,  we  are  measuring  GDP  on  the basis  of  the  prices  prevailing  in  2004-05.

 (3) GDP  at  Factor  Cost  and  GDP  at  Market  Price  : The  contribution  of  each  producing  unit  to the  current  flow  of  goods  and  services  is  known  as  the  net  value  added.  GDP  at  factor  cost is  estimated  as  the  sum  of  net  value  added  by  the  different  producing  units  and  the consumption  of  fixed  capital.  Since  the  net  value  added  gets  distributed  as  income  to  the owners  of  factors  of  production,  we  can  also  estimate  GDP  as  the  sum  of  domestic  factor incomes and consumption of fixed capital. Conceptually, the value of GDP whether estimated at  market  price  or  factor  cost  must  be  identical.  This  is  because  the  final  value  of  goods  and services  (i.e.  market  price)  must  be  equal  to  the  cost  involved  in  their  production  (factor cost). However, the market value of goods and services is not the same as the earnings of the factors of production. GDP at market price includes indirect taxes and excludes the subsidies given  by  the  government.  Therefore,  in  order  to  arrive  at  GDP  at  factor  income  we  must subtract  indirect  taxes  from  and  add  subsidies  to  GDP  at  market  price.

In brief   GDPFC = GDPMP – IT + S

Where IT = Indirect Taxes

S  =  Subsidies

 (4) Gross National Product (GNP) : It has already been seen that whatever is produced within the  domestic  territory  of  a  country  in  a  year  is  its  gross  domestic  product.  It,  however, includes, the contribution made by non-resident producers by way of wages, rent, interest and  profits.  The  non-residents  work  in  the  domestic  territory  of  some  other  country  and earn  factor  incomes.  For  example,  Indian  residents  go  abroad  to  work.  Indian  banks  are functioning  abroad.  Indians  own  property  in  foreign  countries.  The  income  of  all  these people is the factor income earned from abroad. In other words, it is factor income earned from abroad by the residents of India by rendering factor services abroad. Similarly, factor services  are  rendered  by  non-  residents  within  the  domestic  territory  of  India.  Net  factor

income from abroad is the difference between the income received from abroad for rendering factor  services  and  the  income  paid  for  the  factor  services  rendered  by  non-residents  in the  domestic  territory  of  a  country. Gross national product is defined as the sum of the gross domestic product and net factor incomes from abroad. Thus in order to estimate the gross national product of India we have to  add  net  factor  income  from  abroad  i.e.,  income  earned  by  Indian  residents  abroad  minus income  earned  by  non-residents  in  India  to  form  the  gross  domestic  product  of  India.

In  brief  GNP  =  GDP  +  NFIA  (where  NFIA  is  the  net  factor  income  from  abroad)

(5) Net  Domestic  Product  : While  calculating  GDP  no  provision  is  made  for  depreciation allowance  (also  called  capital  consumption  allowance).  In  such  a  situation  gross  domestic product  will  not  reveal  complete  flow  of  goods  and  services  through  various  sectors. It  is  a  matter  of  common  knowledge  that  capital  goods  like  machines,  equipment,  tools, buildings,  tractors  etc.,  get  depreciated  during  the  process  of  production.  After  some  time these  capital  goods  need  replacement.  A  part  of  capital  is  therefore,  set  aside  in  the  form of depreciation allowance. When depreciation allowance is subtracted from gross domestic product  we  get  net  domestic  product.

In  brief

NDP  =  GDP  –  depreciation

(6) Net  National  Product  (NNP)  : It  can  be  derived  by  subtracting  depreciation  allowance from GNP. It can also be found out by adding the net factor income from abroad to the net domestic product. If the net factor income from abroad is positive i.e., the inflow of factor income from abroad is more than the outflow, NNP will be more than NDP; conversely, if net  factor  income  from  abroad  is  negative,  NNP  will  be  less  than  NDP  and  it  would  be equal  to  NDP  in  case  the  net  factor  income  from  abroad  is  zero.

Symbolically, NNP = NDP + NFIA

(7) NNP at factor cost or National Income : NNP at factor cost is the volume of commodities and  services  turned  out  during  an  accounting  year,  counted  without  duplication.  It  can also  be  defined  as  the  net  value  added  at  factor  cost  (by  the  residents)  in  an  economy during  an  accounting  year.  In  terms  of  income  earned  by  the  factors  of  production,  NNP at factor cost or national income is defined as the sum of domestic factor incomes and net factor  income  from  abroad.  If  NNP  figure  is  available  at  market  prices  we  will  subtract indirect taxes and add subsidies to the figure to get NNP at factor cost or national income of  the  economy.

Symbolically,  NNP  at  FC  =  National  Income  =  FID  +  NFIA

where  FID  is  factor  income  earned  in  the  domestic  territory  of  a  country  and  NFIA  is  the net  factor  income  from  abroad. There  are  two  more  concepts:  Personal  Income  and  Personal  Disposal  Income.  Personal income  is  the  sum  of  all  incomes  actually  received  by  individuals  during  a  given  year.  In order  to  estimate  it  we  subtract  from  national  income  the  sum  total  of  social  security contribution  and  corporate  income  taxes  and  undistributed  corporate  profits  and  add personal  payments  which  are  incomes  received  but  not  currently  earned. After the deduction of personal taxes from personal income of the individuals what is left is  called  personal  disposable  income  which  is  equal  to  consumption  plus  saving.

The following statements mathematically summarise the various concepts discussed above and  the  relationship  among  them:

GNP  at  market price  –  depreciation                            =                            NNP  at  market  price.

GNP  at  market  price  –  net  income  from  abroad       =                         GDP  at  market  price.

GNP  at  market  price  –  net  indirect  taxes                   =                          GNP  at  factor  cost.

NNP  at  market  price  –  net  income  from  abroad         =                        NDP  at  market  price.

NNP  at  market  price  –  net  indirect  taxes                    =                          NNP  at  factor  cost.

GDP  at  market  price  –  net  indirect  taxes                   =                            GDP  at  factor  cost.

GNP  at  factor  cost  –  depreciation                                 =                             NNP  at  factor  cost.

NDP  at  market  price  –  net  indirect  taxes                    =                           NDP  at  factor  cost.

GDP  at  factor  cost  –  depreciation                                  =                            NDP  at  factor  cost.

 

(8) Domestic Income: Income generated (or earned) by factors of production within the country from its own resources is called domestic income or domestic product.

Domestic income includes:

(i) Wages and salaries, (ii) rents, including imputed house rents, (iii) interest, (iv) dividends, (v) undistributed corporate profits, including surpluses of public undertakings, (vi) mixed incomes consisting of profits of unincorporated firms, self- employed persons, partnerships, etc., and (vii) direct taxes.

Since domestic income does not include income earned from abroad, it can also be shown as: Domestic Income = National Income-Net income earned from abroad. Thus the difference between domestic income f and national income is the net income earned from abroad. If we add net income from abroad to domestic income, we get national income, i.e., National Income = Domestic Income + Net income earned from abroad.

But the net national income earned from abroad may be positive or negative. If exports exceed import, net income earned from abroad is positive. In this case, national income is greater than domestic income. On the other hand, when imports exceed exports, net income earned from abroad is negative and domestic income is greater than national income.

(9) Private Income: Private income is income obtained by private individuals from any source, productive or otherwise, and the retained income of corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deductions.

The additions include transfer payments such as pensions, unemployment allowances, sickness and other social security benefits, gifts and remittances from abroad, windfall gains from lotteries or from horse racing, and interest on public debt. The deductions include income from government departments as well as surpluses from public undertakings, and employees’ contribution to social security schemes like provident funds, life insurance, etc.

Thus Private Income = National Income (or NNP at Factor Cost) + Transfer Payments + Interest on Public Debt — Social Security — Profits and Surpluses of Public Undertakings.

(10) Personal Income: Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in one year. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are not included in national income.

Personal income is derived from national income by deducting undistributed corporate profits, profit taxes, and employees’ contributions to social security schemes. These three components are excluded from national income because they do reach individuals.

But business and government transfer payments, and transfer payments from abroad in the form of gifts and remittances, windfall gains, and interest on public debt which are a source of income for individuals are added to national income.

Thus Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contribution + Transfer Payments + Interest on Public Debt.

Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits.

Thus Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.

(11) Disposable Income: Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families. The whole of the personal income cannot be spent on consumption, because it is the income that accrues before direct taxes have actually been paid. Therefore, in order to obtain disposable income, direct taxes are deducted from personal income. Thus Disposable Income=Personal Income – Direct Taxes.

But the whole of disposable income is not spent on consumption and a part of it is saved. Therefore, disposable income is divided into consumption expenditure and savings. Thus Disposable Income = Consumption Expenditure + Savings.

If disposable income is to be deduced from national income, we deduct indirect taxes plus subsidies, direct taxes on personal and on business, social security payments, undistributed corporate profits or business savings from it and add transfer payments and net income from abroad to it.

Thus Disposable Income = National Income – Business Savings – Indirect Taxes + Subsidies – Direct Taxes on Persons – Direct Taxes on Business – Social Security Payments + Transfer Payments + Net Income from abroad.

(12) Real Income: Real income is national income expressed in terms of a general level of prices of a particular year taken as base. National income is the value of goods and services produced as expressed in terms of money at current prices. But it does not indicate the real state of the economy.

It is possible that the net national product of goods and services this year might have been less than that of the last year, but owing to an increase in prices, NNP might be higher this year. On the contrary, it is also possible that NNP might have increased but the price level might have fallen, as a result national income would appear to be less than that of the last year. In both the situations, the national income does not depict the real state of the country. To rectify such a mistake, the concept of real income has been evolved.

In order to find out the real income of a country, a particular year is taken as the base year when the general price level is neither too high nor too low and the price level for that year is assumed to be 100. Now the general level of prices of the given year for which the national income (real) is to be determined is assessed in accordance with the prices of the base year. For this purpose the following formula is employed.

Real NNP = NNP for the Current Year x Base Year Index (=100) / Current Year Index

Suppose 1990-91 is the base year and the national income for 1999-2000 is Rs. 20,000 crores and the index number for this year is 250. Hence, Real National Income for 1999-2000 will be = 20000 x 100/250 = Rs. 8000 crores. This is also known as national income at constant prices.

(13) Per Capita Income: The average income of the people of a country in a particular year is called Per Capita Income for that year. This concept also refers to the measurement of income at current prices and at constant prices. For instance, in order to find out the per capita income for 2001, at current prices, the national income of a country is divided by the population of the country in that year.

Similarly, for the purpose of arriving at the Real Per Capita Income, this very formula is used.

 

This concept enables us to know the average income and the standard of living of the people. But it is not very reliable, because in every country due to unequal distribution of national income, a major portion of it goes to the richer sections of the society and thus income received by the common man is lower than the per capita income.

 

The factors that determine national income

Factors determining national income can be discussed as follows-

Ø  Quality and quantity of factors of production: the quality and quantity of land, the climate, the rainfall, etc., determine the quantity and quality of agricultural production. This determines the size of national income. The quantity of labour has double influence since labour is both a factor of production as well as the consumer of what is produced. The quality of labour depends upon intelligence, training, which in turn decides the volume of industrial productivity. This will have decisive influence on output. Likewise, the quantity and quality of entrepreneurial ability is also a main element in the determination of national income.

 

Ø  State of technical know-how: the extent of technical know-how and technology in production determine the capital formation in the country. A country with abundant resources will be dormant without any determination if the resources are not scientifically exploited. Natural resources combined with advanced technology will go a long way in increasing the size of national income.

 

Ø  Political stability: the key to increase the national income rests with important factors like capital formation, natural resources, technical know-how and political stability.

 

DIFFERENT METHODS OF MEASURING NATIONAL INCOME

Production  and  sale  of  goods  and  services  and  the  generation  of  income  which  accompanies these  activities  are  processes  that  go  on  continuously.  Production  gives  rise  to  income;  income gives  rise  to  demand  for  goods  and  services;  and  demand  in  turn  gives  rises  to  expenditure; again  expenditure  leads  to  further  production.  The  circular  flow  of  production,  income expenditure  represents  three  related  phases,  namely,  production,  distribution  and  disposition. These three phases enable us to look at national income in three ways – as a flow of goods and services, as a flow of incomes or as a flow of expenditure on goods and services. To measure it at each phase, we require different data and methods. If we want to measure it at the phase of production,  we  have  to  find  out  the  sum  of  net  values  added  by  all  the  producing  enterprises of the country. If we want to measure it at the phase of income distributed, we have to find out the  total  income  generated  in  the  production  of  goods  and  services.  Finally,  if  we  want  to measure  it  at  the  phase  of  disposition,  we  have  to  know  the  sum  of  expenditures  of  the  three spending  units  in  the  economy,  namely,  government,  consumer  households,  and  producing enterprises.

Corresponding  to  the  three  phases,  there  are  three  methods  of  measuring  national  income. They  are:

(i) Product  Method

(ii) Income  Method;

(iii) Expenditure Method.

(iv) Value  Added  Method  (alternatively  known  as  Product  Method);

 

(i) Product method : This method is popular in U.S.A. and is called as Total Product method or Goods Flow Method. In India, It is known as inventory or Product method. In this method, the economy is classified in to three transaction sector like industrial, services and foreign transaction sector where international payments are considered.

We calculate the money value of all final goods and services produced  in an economy during a year. The money value of these goods and services is calculated at market price. The sum-total is called the GDP at market price.

(ii) Income  Method  : Different  factors  of  production  pool  their  services  for  carrying  out production  activities.  These  factors  of  production,  in  return,  are  paid  for  their  services  in the  form  of  factor  incomes.  Thus  labour  gets  wages,  land  gets  rent,  capital  gets  interest and  entrepreneur  gets  profits.  In  other  words,  whatever  is  produced  by  a  producing  unit is  distributed  among  the  factors  of  production  for  their  services  and  aggregate  of  factor incomes  of  all  the  factors  of  production  of  all  the  producing  units  form  the  subject  matter of  calculation  of  national  income  by  income  method.

Only  incomes  earned  by  owners  of  primary  factors  of  production  are  included  in  national income.  Transfer  incomes  are  excluded from  national  income.  Thus,  while  wages  of labourers will  be  included,  pensions  of  retired  workers  will  be  excluded  from  national  income.  Labour income  includes,  apart  from  wages  and  salaries,  bonus,  commission,  employers’  contribution to  provident  fund  and  compensations  in  kind.  Non-labour  income  includes  dividends, undistributed  profits  of  corporations  before  taxes,  interest,  rent,  royalties  and  profits  of unincorporated  enterprises  and  of  government  enterprises.

However,  normally,  it  is  difficult  to  separate  labour  income  from  capital  income  because  in many  instances  people  provide  both  labour  and  capital  services.  Such  is  the  case  with  self- employed people like lawyers, engineers, traders, proprietors etc. In economies where subsistence production and small commodity production is dominant most of the incomes of people would be of mixed type. In sectors such as agriculture, trade, transport etc. in underdeveloped countries (including  India),  it  is  difficult  to  differentiate  between  labour  element  and  capital  element  of incomes  of  the  people.  In  order  to  overcome  this  difficulty  a  new  category  of  incomes,  called mixed  income  is  introduced  which  includes  all  those  incomes  which  are  difficult  to  separate.

(iii) Expenditure  Method: The  various  sectors  –  household  sector,  business  sector  and government  sector  either  spend  their  incomes  on  consumer  goods  and  services  or  save  a  part of  their  incomes  or  we  can  say  that  they  spend  a  part  of  their  incomes  on  non-consumption goods  (or  capital  goods). Total expenditure in an economy consists of expenditure on financial assets, on goods produced in preceding periods, on raw materials and intermediate goods and services and on final goods and  services  produced  in  the  current  period. Expenditure on financial assets which are produced and owned within the country is excluded but  expenditure  on  financial  assets  of  foreign  countries  is  included  in  national  expenditure.

However, only the net expenditure i.e., the difference between expenditure on foreign financial assets  by  residents  and  expenditure  on  the  country’s  financial  assets  by  non-residents  or foreigners is incorporated. This difference is also called net foreign investment. Goods produced in  preceding  years  are  also  excluded  from  national  income  because  they  have  been  accounted for in the national incomes of the periods when they were produced. Similarly, expenditure on raw materials and intermediate goods and services are excluded because otherwise there would be  double  counting  of  some  of  the  items  included  in  the  national  income.  Government expenditure  on  pensions,  scholarships,  unemployment  allowance  etc.  should  be  excluded because  these  are  transfer  payments. Thus,  only  expenditure  on  final  goods  and  services  produced  in  the  period  for  which  national income  is  to  be  measured  and  net  foreign  investment  are  included  in  the  expenditure  method of  calculating  national  income.

Gross national expenditure = Consumption expenditure + net domestic investment + net foreign investment  +  replacement  expenditure  (i.e.,  expenditure  on  replacement  investment).

Net national expenditure = Consumption expenditure + net domestic investment + net foreign investment.

Net  domestic  expenditure  =  Consumption  expenditure  +  net  domestic  investment

(iv) Value  Added  Method: Value  added  method  measures  the  contribution  of  each  producing enterprise  in  the  domestic  territory  of  the  country.  This  method  involves  the  following steps:

(a) Identifying  the  producing  enterprise  and  classifying  them  into  industrial  sectors according  to  their  activities.

(b) Estimating  net  value  added  by  each  producing  enterprise  as  well  as  each  industrial sector  and  adding  up  the  net  value  added  by  all  the  sectors.

All the producing enterprises are broadly classified into three main sectors namely: (1) Primary sector  which  includes  agriculture  and  allied  activities;  (2)  Secondary  sector  which  includes manufacturing  units  and  (3)  Tertiary  sector  which  include  services  like  banking,  insurance, transport  and  communications,  trade  and  professions.  These  sectors  are  further  divided  into sub-sectors  and  each  sub-sector  is  further  divided  into  commodity  group  or  service-group.

For  calculating  the  net  product  of  the  industrial  sector  we  need  to  know  about  gross  output  of the  sector,  the  raw  materials  and  intermediate  goods  and  services  used  by  the  sector  and  the amount  of  depreciation.  For  an  individual  unit,  we  subtract  from  the  value  of  its  gross  output, the  value  of  the  raw  material  and  intermediate  goods  and  services  used  by  it  and,  from  this,  we subtract  the  amount  of  depreciation  to  get  net  product  or  value  added  by  each  unit.  Adding value-added  by  all  the  units  in  one  sub-sector,  we  get  value-added  by  the  sub-sector.  Again adding  value-added  or  net  products  of  all  the  sub-sectors  of  a  sector  we  get  value-added  or  net product  of  that  sector.  For  the  economy  as  a  whole,  we  add  net  products  contributed  by  each sector to get Net Domestic Product. If the information regarding the final output and intermediate goods  is  available  in  terms  of  market  prices  we  can  easily  convert  it  in  terms  of  factor  costs  by subtracting  (or  adding  as  the  case  may  be)  net  indirect  taxes  to  it.  If  we  add  or  subtract  net income  from  abroad  we  get  Net  National  Product  at  factor  cost  which  is  nothing  but  National Income.

Care  should  be  taken  to  include  the  value  of  the  following  items  :

(a) Own  account  production  of  fixed  assets  by  government,  enterprises  and  households.

(b) Production  for  self-consumption.

(c) Imputed  rent  of  owner  occupied  houses.

SSC Economic Study Material
Estimation of the national income of a country is not an easy task.  Appropriate and completely reliable  data  for  accomplishing  this  work  is  not  available  even  in  developed  countries.    The following  problems  require  particular  mention:

(1)   Presence of a  large  non-monetized  sector

(2)   Lack  of appropriate  and  reliable  data

(3)   Problem of double  counting

(4)   Problem of transfer  payments

(5)   Difficulties in classification of  working  population

(6)   Unreported  illegal  income

 

 

DIFFICULTIES IN CALCULATION OF NATIONAL INCOME

The measurement of national income is beset with difficulties. In under developed countries these difficulties are more prominent. The difficulties in calculation of national income can be discussed as follows:

 

  • Conceptual difficulties: there has been a difference of opinion regarding the term ‘nation’ in the concept of national income. It has to define exactly, whether it is geographical entity of the country or the nationals including those residing abroad. Since national income constitutes a quantitative measure of economics activity rather than verbal description. Since everything has to be equated to the money value, services produced in economy for love of humanity, affection and philosophy could not be taken into consideration in calculating national income.

 

  • Overlapping of occupations: in backward economies there is an overlapping of occupation in rural sector which makes it difficult to know the income by origin. A worker in a peak season works in a farm, drives a country cart in off season. Takes up unskilled work, etc. similarly, the village money lender combines his profession with the cultivating of his farm.

 

  • Difficulty in value estimation: in backward areas, the cultivators, artisans and cottage industry workers do not have a fair idea of the expenses of their occupation. Hence the net value of their products cannot be estimated precisely.

 

  • Non- monetized sector: barter dealing and non-monetized sector creates the problem of inputting the value of their produce and services and by guess work and approximation.

 

  • Incomplete government records: due to ignorance and illiteracy in backward areas, the data may not be available and if available, may be unreliable. Also, the figures furnished by government officials may not be from reliable sources and data is not current.

 

  • Problems in agricultural sector: in agricultural activities there is a good deal of guess work in data relating to cropwise production and in figures relating to animals and forest products.

 

  • Problems in industrial sector: data relating to output, cost, etc. are available only in big units. The small units do not maintain these figures correctly. The village money lenders and indigenous bankers maintain absolute secret of their and they do not furnish correct information.the Link Below-

 

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