Following a suitable method, deductible costs including depreciation are estimated for each sector. This involves drawing a distinction between final and intermediate purchases and transaction. Since the measurement of national income through any of these approaches methods should yield identical results, they provide a cheek against each other. It has been argued passionately by some that women who stay at home to look after children should have this service valued and included in national income. This would give us a measure in 2002 of 1500 x £2.
Provided double counting is avoided, it is possible to derive national income estimates partly by one and partly by other methods according to the availability of data. The production of bread, for Instance, has three stages i,e. Unpaid services :- The value of free services may not be included in the national income. Find the national accounts link by scrolling down the list on the left hand navigational bar and examine the different measures of national income. Pigou and expenditure method by Dr.
To derive estimates at factor costs, an adjustment has to be made for indirect taxes net of subsidies, if any. According to this method only the final goods and services are included and the intermediary goods and services are not taken into account. Different concepts of National Income 1. National income at market price. The total thus obtained is taken to be· the measure of net national products or national income by product method. In fact, the market prices of most of the commodities that we buy include indirect taxes and some of them include an element of subsidy. They point out the proportion of national income received by different sections of society.
These are also called nominal prices. Which method is to be employed depends on the availability of data and purpose. Danger of double counting :- We can avoid from this danger by the following ways : i We should add up the value of those goods which have reached to the final shape and are available for consumption. Examples include designer jewellery, perfumes, meals in expensive restaurants and sports cars. Interest paid on government bonds is to be excluded for a simple reason. This method is extensively used because the requisite data required by this method can be collected with greater ease and accuracy. For this reason, many countries adopt factor income method for estimating their national income.
Hence this method is employed along with other methods to arrive at the national income. Governments calculate how much output, income, and expenditure takes place in the economy in one year. Hence, they are called leakages from the circular flow. Therefore, for estimating national income factors of production are broadly grouped as labor and capital. The Product Output Method 2.
If there are gaps in data then some estimates are made to fill the gaps. Economic welfare depends to a considerable degree on the level of national income and the average standard of living of the people. Above, we have discussed the various methods of estimating of national income, whatever method may be used for the estimation of national income, double counting must be avoided. Thus, the same total can be reached by either summing up the value added at each stage of production or summing up all the factor incomes generated in the process of production. Thus, it is a partly of return to land and partly a return to capital. The various incomes included to compute the gross national income are: All the above three methods must yield the same results because the total expenditures on output must by definition be equal to the value of the output produced which must be equal to the total income paid to the factors that produced these goods and services.
Expenditure Method These methods are discussed billow: 1. In our example, tyres and tubes, glass, steel, electricity were all intermediate goods used at various stages in the production process while cars were final goods. Any discrepancy among the three measures is due to statistical error. The major challenge of this method is the problem of double-counting. Deduction of indirect taxes :- The indirect taxes must be deducted from the prices of goods which have been levied by the government on the commodities produced for sale. Therefore, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs including undistributed corporate profits and incomes of self-employed people.
Corporate profit tax that is, tax on income of the companies should not be separately included as it has already been included as a part of profits. Sale and purchase of second-hand goods should not be included in measuring value of output of a year because their values were counted in the year of output of the year of their production. International comparisons are even more difficult as the exchange rates fluctuate after 1971, prices and inflation differ in different countries, transport costs must be included, there are different levels of subsistence economy and the govn expenditure patterns differ. The outputs can be grouped into certain product categories corresponding to industries or to sectors such as the primary sector, secondary sector and the tertiary sector. Trends of the economy : National income estimates are also useful for knowing the trends of the economy. Certain other categories of income such as incomes from incidental jobs, gratuities and tips are ignored because of non-availability of data. Income from employment item no.
So there is a problem in ascribing an appropriate value to these goods for national income calculation. But actually the calculations often have to be income or expenditure bases and we have very limited information on some sectors as no-one collects the data. Value Added Method : This is also called output method or production method. The use of the above three methods depends on the level at which the national income is calculated. Either the price paid by the final consumer to the baker or the value added at each stages i. Sum of this factor income becomes national income under the Income method.
However, availability of adequate and appropriate data is relatively more important considerations in selecting a method of estimating national income. Nevertheless, the retained earnings are recorded as a receipt of property income. According to product method, the total value of final goods and services produced in a country during a year is calculated at market prices. Factor Cost Measure: National expenditure is measured at market prices. We may employ any of the three methods, the national income will be the same in each case.