All transfer expenditure is to be excluded to avoid double counting. Therefore, if we are to arrive at the factor cost value, we have to deduct taxes on expenditure and add subsidies to the market price valuations. They also acquaint us about the proportions of rent wages, interest and profits in the national income. These Ls are countered by injections J which is comprised of: government spending G , investment expenditure I , and export expenditure X. Hence these estimates are considered as the main basis for devising economic policies by the government. National Incomes estimates reveal the changes in the standard of living of the people.
Income paid out by each enterprise can be estimated by gathering information about the number of units of each factor employed and the income paid out to each unit of every factor. 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. Value Added Method : This is also called output method or production method. Test your knowledge with a quiz. Under this method, the economy is divided into different industrial sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. It is the figure one arrives at when one applies the measuring rod of money to the diverse goods and services—from computer games to machine tools—that a country produces with its land, labour, and capital resources and it equals the sum of the money values of all consumption and investment goods, government purchases, and net exports to other countries.
Value Added or Product Method According to value added method of calculating national income, the national income is the aggregate money value of goods and services produced over the period of one year. Gross domestic capital formation is divided into two parts: i Gross fixed capital formation ii Addition to the stocks or inventories of goods 4. Expenditure on exports and imports. All of the transactions in an economy can be looked at in this way, giving us three ways to measure national income. Factor-Income Method This method is also known as income method and factor-share method. Mixed Income: Mixed incomes include income from a farming b sole proprietorship c other professions such as legal and medical practices, consultancy services, trading and transporting.
In fact, relative prices furnish the basis for combining the commodities in the purchase plans of the consumers. Note that all three counting methods should in theory give the same final figure. This reduces the overall income of a nation. This method is used when national economy is viewed as a collection of spending units. The total thus obtained is taken to be· the measure of net national products or national income by product method.
To find the real value of changes in output under inflationary conditions, the effects of any general price increase price inflation must be taken into account. But there are times when it is difficult to decide which goods to include and which to exclude. Definition of National Income The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation. The main items of income are shown in Table 1. Income from Abroad: What is the gross national product? Several economists like Marshall, Pigou, Fisher, Simon Kuznets offered valuable definitions on national income. The adding up of factor payments by all enterprises belonging to an industrial sector would give us the incomes paid out to various factors by a particular industrial sector. It measures national income at the final expenditure stages.
Mixed income of the self-employed: In India as in other developing countries there is fifth category of factor income which is termed as mixed income of self-employed. However, an imputed value is given to owner occupied houses and an estimate is made of the value of food consumed by farmers themselves. Therefore, it is necessary to make some adjustments in the data for obtaining these incomes. Fixed investment in turn has two major components: — Business fixed investment, which is spending by businesses on structures factories, warehouses, and office buildings, for example and equipment such as machines, vehicles, and furniture ; and — Residential investment, which is spending on the construction of new houses and apartment buildings. Item number 4 is the major part of return on capital to the private sector.
If the objective is to analyse the net output, then the net output method would be more suitable. Wages, proprietor's incomes, and corporate profits are the major subdivisions of income. The income of these individuals are called mixed incomes and are also accounted for calculating the national income. Transfer payments are not included in estimating national income through this method. Windfall gains such as prizes won, lotteries are also not included. However, for an individual economic transaction to be included in aggregate national income it must involve the purchase of newly produced goods or services. Further, people of foreign countries spend on the goods and services which a country exports to them.
Value added can be defined as the difference between the value of output produced by that firm and the total expenditure incurred by it on the materials and intermediate products purchased from other business firms. Second, the rifer turns it into flour and sells it to the baker. The net sectoral products are then added together. Personal Incomes: National income is not the sum of all personal incomes. The Value Added Method In the value added method of measuring national income, the value of materials added by producers at each stage of production to produce the final good is considered. The production of bread, for Instance, has three stages i,e. Traditionally, at some percentage of capital, permissible under the tax-laws.