Ways of measuring national income. Measuring National Income 2019-01-19
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Methods for Measuring National Income
National and Domestic Concepts The term national denotes that the aggregate under consideration represents the total income which accrues to the normal residents of a country due to their participation in world production during the current year. Due to lack of popularity of personal accounting practices, this method cannot be fully used or practiced. Stock Adjustment and Capital Gains and Losses: Finally, stock appreciation adjustment has to be made in order to eliminate the element of windfall gain in the profits received. This is known as the shadow economy. Income product is equal to the sum of wages, salaries, supplementary labor incomes, interest, profits, and net rent paid or accrued. The factor payments are classified into the following groups: i. This method is usually used in case of owner-occupied houses i.
Wages, proprietor's incomes, and corporate profits are the major subdivisions of income. Item number 6 is depreciation which is the reduction in the value of capital goods due to their contribution to the production process. One can however obtain an estimate of national income by summing up the private incomes after making necessary adjustments for the items excluded from the national income. There expenditures include personal consumption expenditure, net domestic investment, Govt, expenditure on goods and-services, and net foreign investments, Govt, expenditure and net foreign investment. We have defined national income from the angle of product flows.
Private transfers of money from one individual to another should also be ignored. According to this method only the final goods and services are included and the intermediary goods and services are not taken into account. The actual usefulness of a product its use-value is not measured — assuming the use-value to be any different from its market value. Measurement of national income in an economy is very important because it gives an estimation of the welfare of the economy. According to income method, the net income payments received by all citizens of a country in a particular year are added up. It is also possible to measure the value of the total output or income originating within the specified geographical boundary of a country known as domestic territory. Income equal to the value of production used for self-consumption should be estimated and included in the measure of national income.
In short, certain goods and services may be provided by a person for himself or herself and it is very difficult to include these in calculations altogether. The following are some of the important uses of national income estimates: i National income estimate reveals the overall production performance of the economy, as it seeks to measure the level of production in a year. In some activities, however, labour and capital are jointly supplied and it is difficult to separate the labour and capital contents from the total earnings of the supplier. Factor incomes are those paid in exchange for factor services like wages, rent, interest etc. Expenditure Method The expenditure method, is also known as final product method.
From the value added by each enterprise we subtract consumption of fixed capital i. According to these methods total expenditure equals the national income. On this basis, national income has been defined in a number of ways. Such second-hand transactions are called transfers. A short period rise in national income during an upswing of an economic cycle does not constitute economic development. This is a serious problem in all market-based economies.
Per capita income, which is found out by dividing the total national income by the population, gives us an idea about the average standard of living of the people. This is called final private consumption expenditure, and is denoted by C. Like the value added method, the first step in income method is also to identify the productive enterprises and then classify them into various industrial sectors such as agriculture, fishing, forestry, manufacturing, transport, trade and commerce, banking, etc. The total output of the economy is the sum of the outputs of every industry. Broadly speaking, economic activities include all human activities which create goods and services that can be valued at market price. Subsistence sector growing for own sake can also contribute considerably to the national welfare in less developed countries.
National income is the most important macroeconomic variable and determinant of the business level and environment of a country. These prices differ from the factor cost values by the amount of taxes and subsidies they contain. There is often no sector by sector breakdown, variations and linkages among components exist, it is difficult to measure and some of the measures can only be guesswork. What is the distinction between current and real terms of these entities? Labour gets wages and salaries, capital gets interest, land gets rent and entrepreneurship gets profit as their remuneration. For using this method, we need data related to income and saving of the consumers.
It measures national income at the final expenditure stages. Accordingly, the national income equals the sum of the corresponding factor earning. Factor Cost Measure: National expenditure is measured at market prices. In the process, some nations get net income through foreign trade while some lose their income to foreigners. There are three main approaches to measuring National Income these are; 1. 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.
