Methods for Measuring National Income

We have so far been concerned with microstinting aspects of managerial stintings. This chapter onwards, we will deal with macroeconomic aspects of managerial economics. The major aspects of macroeconomics that be gener eachy utilize in n adept analysis, especially in analyzing and infrastanding credit line environment of the country acknowledge (i) the level and trends in issue income, (ii) agents determining field income, (iii) cyphers and forces leading to trading cycles, (iv) the trend in general lend of price, especially inflation, (v) inter field of study economic aspects, and (vi) brass policies, especially fiscal and mo straighten come out(a)ary policies.In this chapter, we will discuss the gist and modes of metre realmal income and the manners of measuring matter income in India.10. 1 unit OBJECTIVESTo define subject field income and its importance To discuss various manners of measuring field income To describe the methods utilize in India for mea suring subject income To show the harvest-festival and trends in home(a) income of India.10. 2 DEFINITION OF NATIONAL INCOMENational income is the remunerationt topic of all economic activities of a nation shelterd in wrong of coin. National income is the most great macroeconomic variable and determinant of the headache level and environment of a country. The level of bailiwick income determines the level of pile up demand for dears and serve. Its distri plainlyion pattern determines the pattern of demand for goods and serve, i. e. , how much of which good is demanded. The trend in guinea pig income determines the trends in aggregate demand, i. e. , the demand for the goods and supporters, and besides the business prospects. Therefore, business decision makers need to keep in intellectual these aspects of the case income, especially those having long-run implications.National income or a relevant constituent of it is an indispensable variable considered in dem and forecasting. Conceptually, national income is the money attentiveness as of the end result of all economic activities of the nation. Economic activities fork over a large number of goods and services, and make net addition to the national sprout of smashing. These together constitute the national income of a unopen miserlinessan delivery which has no economic transactions with the moderation of the world. In an open prudence, national income overwhelms also the net results of its transactions with the rest of the world (i. e., exports less(prenominal) imports).Economic activities should be distinguished from the non-economic activities from a national tier of view. Broadly speaking, economic activities include all human activities which create goods and services that shag be fosterd at market price. Economic activities include occupation by farmers (whether for household con midpointption or for market), crosswayion by firms in the industrial sector, issue of go ods and services by the government enterprises, and services produced by business intermediaries ( consentientsalers and retailers), banks and other financial organizations, universities, colleges andhospitals, etceteraOn the other tidy sum, non-economic activities be those which produce goods and services that do not have any economic legal community. Non-economic activities include spiritual, psychological, social and policy-making services. The non-economic year of activities also includes hobbies, service to self, services of housewives, services of members of family to other members and sub of mutual services mingled with neighbours. We have define national income from the move of reaping flows. The aforementioned(prenominal) brush off be defined in basis of money flows.While economic activities generate flow of goods and services, on the one hand, they generate money flows, on the other, in the form of part paymentswages, interest, contain, win, and bread of self-employed. Thus, national income whitethorn also be obtained by adding the factor earnings and adjusting the sum for substantiative taxes and subsidies. The national income thus obtained is known as national income at factor monetary quantify. It is related to money income flows. The opinion of national income is linked to the fellowship as a whole. It differs fundamentally from the concept of secret income.Conceptually, national income refers to the money determine of the entire last goods and services resulting from all economic activities of the country. This is not true of private income. Also from the calculation point of view, there atomic number 18 certain receipts of money or of services and goods that ar not ordinarily include in private incomes but ar include in the national incomes, and vice versa. National income includes, for example, employers contribution to the social certification and eudaemonia funds for the benefit of employees, profits of public enterprises, and services of possessor occupied houses. save it excludes the interest on war-loans, social security benefits and pensions. There items ar, however, included in the private incomes. The national income is, therefore, not merely an aggregation of the private incomes. One can however obtain an estimate of national income by summing up the private incomes after making requirement adjustments for the items excluded from the national income.10. 3 MEASURES OF NATIONAL INCOME10. 3. 1 Gross National Product (gross national mathematical product)Of the various preventions of national income utilize in national income analysis, gross national product is the most important and wide apply measure of national income. It is the most comprehensive measure of the nations amentaceous activities. The gross national product is defined as the grade of all final goods and services produced during a specific level, usually one year, confirming incomes get oversea by the nation als minus incomes bring in locally by the contradictoryers. The gross national product so defined is identical to the concept of gross national income (GNI). Thus, gross national product = GNI. The difference betwixt the two is only of procedural nature.While gross national product is estimated on the basis of product-flows, the GNI is estimated on the basis of money income flows, (i. e. , wages, profits, absorb, interest, etc. ).NOTES 10. 3. 2 Gross domestic help Product (GDP)The Gross Domestic Product (GDP) is defined as the market note value of all final goods and services produced in the domestic economy during a period of one year, plus income earned locally by the foreigners minus incomes earned foreign by the nationals. The concept of GDP is similar to that of GNP with a significant procedural difference.In strip of GNP the incomes earned by the nationals in foreign countries are added and incomes earned locally by the foreigners are deducted from the market value of domestically produced goods and services. In case of GDP, the dish is vacate incomes earned locally by foreigners are added and incomes earned abroad by the nationals are deducted from the issue forth value of domestically produced goods and services.10. 3. 3 Net National Product (NNP)NNP is defined as GNP less depreciation, i. e. , NNP = GNP wear and tear Depreciation is that recess of total productive assets which is used toreplace the metropolis worn out in the process of creating GNP. Briefly speaking, in the process of producing goods and services (including capital goods), a part of total stock of capital is used up. Depreciation is the term used to denote the worn out or used up capital. An estimated value of depreciation is deducted from the GNP to come through at NNP. The NNP, as defined above, ca-cas the measure of net output available for consumption and coronation by the lodge (including consumers, producers and the government). NNP is the real measure of th e national income.NNP = NNI (net national income). In other words, NNP is the same as the national income at factor cost. It should be noted that NNP is mensurable at market prices including direct taxes. Indirect taxes are, however, not a point of actual cost of action. Therefore, to obtain real national income, indirect taxes are deducted from the NNP. Thus, NNPindirect taxes = National Income.10. 3. 4 National IncomeSome report Relationships (a) Accounting Indentities at Market Price GNP ? GNI (Gross National Income) GDP ? GNP less Net Income from AbroadNNP ? GNP less Depreciation NDP (Net Domestic Product) ? NNP less net income from abroad (b) Some Accounting Indentities at performer Cost GNP at factor cost ? GNP at market price less net indirect taxes Check Your maturate 1. How is national income defined? 2. What are the measures of national income? 3. What is the difference between GNP and GDP? 4. What is meant by NNP? NNP at factor factor factor factor cost ? NNP at mar ket price less net indirect taxescost ? NNP at market price less net income from abroad cost ? NDP at market price less net indirect taxes cost ? GDP at market price less Depreciation NOTES10. 4 METHODS OF MEASURING NATIONAL INCOMEFor measuring national income, the economy by dint of which people participate in economic activities, earn their livelihood, produce goods and services and share the national products is viewed from troika different angles. (1) The national economy is considered as an aggregate of producing units combining different sectors much(prenominal) as agriculture, mining, manufacturing, patronage and commerce, etc.(2) The whole national economy is viewed as a cabal of individuals and households owning different kinds of factors of production which they use themselves or sell factor-services to make their livelihood. (3) The national economy may also be viewed as a collection of consuming, saving and put units (individuals, households and government). Follow ing these notions of a national economy, national income may be measured by terzetto different corresponding methods (1) Net product methodwhen the entire national economy is considered as an aggregate of producing units(2) Factor-income methodwhen national economy is considered as combination of factor-owners and users (3) Expenditure methodwhen national economy is viewed as a collection of spending units. The procedures which are followed in measuring the national income in a closed economyan economy which has no economic transactions with the rest of the worldare briefly expound here. The measurement of national income in an open economy and adjustment with regard to income from abroad will be discussed subsequently. 10. 4. 1 Net Output or Value-Added Method The net output method is also called the value added method.In its bill form, this method consists of triad stages (i) estimating the gross value of domestic output in the various branches of production (ii) determining t he cost of material and services used and also the depreciation of physical assets and (iii) deducting these costs and depreciation from gross value to obtain the net value of domestic output. The net value of domestic product thus obtained is often called the value added or income product which is equal to the sum of wages, salaries, adjuvant tire out incomes, interest, profits, and net rent gainful or accrued. Let us now describe the stages (i) and (ii) in both(prenominal) detail.Measuring Gross Value. For measuring the gross value of domestic product, output is sort under various categories on the basis of the nature of activities from which they get up. The output assortment varies from country to country depending on (i) the nature of domestic activities (ii) their significance in aggregate economic activities, and (iii) handiness of requisite entropy. For example, in the US, about lxxi divisions and subdivisions are used to tell apart the national output in Canada and the Netherlands, classification ranges from a dozen to a score and in Russia, only half(prenominal) a dozen divisions are used.According to the CSO publication, fifteen sub-categories are electric currently used in India. 300 Self-Instructional Material After the output is classified under the various categories, the value of gross output is computed in two resource ways (i) by multiplying the output of each category of sector by their respective market price and adding them together, or (ii) by collective data about the gross sales and changes in inventories from the direct of the manufacturing enterprises and computing the value of GDP on the basis thereof.If there are gaps in data, whatsoever estimates are do thereof and gaps are filled. Estimating Cost of Production. The next smell in estimating the net national product is to estimate the cost of production including depreciation. Estimating cost of production is, however, a relatively more complicated and rough trav ail because of nonavailability of adequate and requisite data. Much more difficult is the task of estimating depreciation since it involves both conceptual and statistical problems.For this reason, many countries adopt factor-income method for estimating their national income. However, countries adopting net-product method find some ways and means to think the deductible cost. The costs are estimated either in absolute footing (where input data are adequately available) or as an overall ratio of input to the total output. The general exert in estimating depreciation is to follow the usual business practice of depreciation accounting. Traditionally, depreciation is deliberate at some percentage of capital, permissible under the tax-laws.In some estimates of national income, the estimators have deviated from the traditional practice and have instead estimated depreciation as some ratio of the current output of final goods. Following a sufficient method, deductible costs includin g depreciation are estimated for each sector. The cost estimates are then deducted from the sectoral gross output to obtain the net sectoral products. The net sectoral products are then added together. The total thus obtained is taken to be the measure of net national products or national income by net product method.10. 4. 2 Factor-Income MethodThis method is also known as income method and factor-share method. under(a) this method, the national income is calculated by adding up all the incomes accruing to the basic factors of production used in producing the national product. Factors of production are conventionally classified as land, press, capital and organization. Accordingly, the national income equals the sum of the corresponding factor earning. Thus, National income = Rent + Wages + Interest + ProfitHowever, in a ultramodern economy, it is conceptually very difficult to make a distinction between earnings from land and capital, on the one hand, and between the earnings f rom usual labour and entrepreneurial functions, on the other. For the purpose of estimating national income, therefore, factors of production are broadly grouped as labour and capital. Accordingly, national income is supposed to originate from two primary factors, viz. , labour and capital. 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.Such incomes are termed as fuse incomes. Thus, the total factor-incomes are grouped under threesome categories (i) labour incomes (ii) capital incomes and (iii) mixed incomes. Labour Incomes. Labour incomes included in the national income have three components (a) wages and salaries paid to the residents of the country including bonus and commission, and social security payments (b) supplementary labour incomes including employers contribution to social security and employees welfare funds, and direct pension payments to re tired employees2 (c) supplementary labour incomes in kind, e.g. , free wellness and education, food and clothing, and accommodation, etc.Compensations in kind in the form of domestic servants and such other free-of-cost services provided to the employees are included in labour income. contend bonuses, pensions, service grants are not included in labour income as they are regarded as transfer payments. Certain other categories of income, e. g. , incomes from incidental jobs, gratuities, tips etc. , are ignored for lack of data.Capital Incomes. capital earningsNOTESAccording to Studenski, capital incomes include the followers (a) dividends excluding inter-corporate dividends (b) undistributed before-tax profits of corporations (c) interest on bonds, mortgages, and saving deposits (excluding interests on war bonds, and on consumer-credit) (d) interest earned by insurance companies and assign to the insurance policy reserves (e) net interest paid out by commercial banks (f) net rents from land, buildings, etc. , including imputed net rents on owneroccupied dwellings (g) royalties and (h) profits of government enterprises.The data for the first two items are obtained mostly from the firms accounts submitted for receipts purposes. But the definition of profit for national accounting purposes differs from that employed by taxation authorities. Some adjustments in the income tax data become, therefore, necessary. The data adjustments by and large pertain to (i) excessive allowance of depreciation do by the firms (ii) excretory product of capital gains and exhalationes since these do not reflect the changes in current income and (iii) elimination of under or over-valuation of inventories on book-value.Mixed Income. Mixed incomes include earnings from (a) farming enterprises, (b) sole proprietorship (not included under profit or capital income) and (c) other professions, e. g. , legal and medical practices, consultancy services, trading and transporting etc. Thi s category also includes the incomes of those who earn their living through various sources as wages, rent on own property, interest on own capital, etc. all in all the three kinds of incomes, viz. , labour incomes, capital incomes and mixed incomes added together give the measure of national income by factor-income method.10. 4. 3 Expenditure MethodThe using up method, also known as final product method, measures national income at the final expenditure stages. In estimating the total national expenditure, any of the two following methods are followed first, all the money expenditures at market price are computed and added up together, and second, the value of all the products finally disposed of are computed and added up, to arrive at the total national expenditure.The items of expenditure which are taken into account under the first method are (a) private consumption expenditure (b) direct tax payments (c) payments to the non-profitmaking institutions and charitable organizatio ns like schools, hospitals, orphanages, etc. and (d) private savings. below the second method, the following items are considered (a) private consumer goods and services (b) private investment goods (c) public goods and services and (d) net investment abroad. The second method is more extensively used because the data required in this method can be collected with greater ease and accuracy.Treatment of Net Income from Abroad.We have so far discussed methods of measuring national income of a closed economy. But most economies are open in the sense that they carry out foreign trade in goods and services and financial transactions with the rest of the world. In the process, some nations get net income through foreign trade while some lose their income to foreigners. The net earnings or loss in foreign trade affects the national income. In measuring the national income, therefore, the netresult of external transactions are adjusted to the total.Net incomes from abroad are added to, and net losses to the foreigners are deducted from the total national income arrived at through any of the above three methods. Briefly, speaking, all exports of merchandise and of services like shipping, insurance, banking, tourism, and gifts are added to the national income. And, all the imports of the corresponding items are deducted from the value of national output to arrive at the approximate measure of national income. To this is added the net income from foreign investment.These adjustments for international transactions are based on the international balance of payments of the nations.10. 5 CHOICE OF METHODSAs discussed above, there are three standard methods of measuring the national income, viz. , net product (or value added) method, factor-income or factor cost method and expenditure method. All the three methods would give the same measure of national income, provided requisite data for each method is adequately available. Therefore, any of the three methods may be select to measure the national income.But all the three methods are not suitable for all the economies simply for non-availability of necessary data and for all purposes. Hence, the question of plectron of method arises. The two main considerations on the basis of which a grumpy method is chosen are (i) the purpose of national income analysis, and (ii) availability of necessary data. If the objective is to prove the net output or value added, the net output method is more suitable. In case the objective is to analyse the factor-income distribution, the suitable method for measuring national income is the income method.If the objective at hand is to find out the expenditure pattern of the national income, the expenditure or final products method should be applied. However, availability of adequate and appropriate data is a relatively more important consideration is selecting a method of estimating national income. Nevertheless, the most common method is the net product method because (i ) this method requires classification of the economic activities and output thereof which is much easier than to classify income or expenditure and (ii) the most common practice is to collect and fig up the national income data by the division of economic activities.Briefly speaking, the easy availability of data on economic activities is the main reason for the popularity of the output method. It should be however borne in mind that no single method can give an accurate measure of national income since the statistical system of no country provides the total data requirements for a particular method. The usual practice is, therefore, to combine two or more methods to measure the national income. The combination of methods again depends on the nature of data required and sectoral break-up of the available data.10. 6 MEASUREMENT OF NATIONAL INCOME IN INDIACheck Your Progress In India, a opinionated measurement of national income was first attempted in 1949. Earlier, many attempts we re made by some individuals and institutions. The earliest estimate of Indias national income was made by Dadabhai Naoroji in 186768. Since then many attempts were made, mostly by the economists and the government authorities, to estimate Indias national income3. These estimates differ in coverage, concepts and methodology and are not comparable.Besides, earlier estimates were mostly for one year, only some estimates cover a period of 3 to 4 years. It was therefore not affirmable to construct a consistent series of national income and assess the public presentation of the economy over a period of time. 5. What are the methods of measuring national income? 6. What is value-added method? 7. What is factor-income method of measuring national income? 8. How is income from abroad adjusted in national income?In 1949, A National Income Committee (NIC) was appointed with P. C. Mahalanobis as its Chairman, and D. R. Gadgil and V. K. R. V. Rao as members. The NIC not only highlighted the li mitations of the statistical system of that time but also suggested ways and means to improve data collection systems. On the recommendation of the Committee, the Directorate of National Sample Survey was set up to collect additional data required for estimating national income. Besides, the NIC estimated the countrys national income for the period from 194849 to 195052.In its estimates, the NIC also provided the methodology for estimating national income, which was followed public treasury 1967. In 1967, the task of estimating national income was given to the Central Statistical face (CSO). Till 1967, the CSO had followed the methodology laid down by the NIC. Thereafter, the CSO adopted a relatively improved methodology and procedure which had become possible due(p) to increased availability of data. The improvements pertain mainly to the industrial classification of the activities. The CSO publishes its estimates in its publication, Estimates of National Income.Methodology used in India Currently, net output and factor income methods are used by the CSO to estimate the national income of the country. The output method is used for agriculture and manufacturing sectors, i. e. , the commodity producing sectors. For these sectors, the value added method is adopted. Income method is used for the service sectors including trade, commerce, transport and government services. In its conventional series of national income statistics from 1950-51 to 1966-67, the CSO had reason the income in 13 sectors.But, in the revised series, it had adopted the following 15 break-ups of the national economy for estimating the national income (i) Agriculture (ii) Forestry and logging (iii) Fishing (iv) exploit and quarrying (v) Large-scale manufacturing (vi) Small-scale manufacturing (vii) Construction (viii) Electricity, gas and water show (ix) Transport and communication (xii) Real estate and dwellings (xiii) Public Administration and defensive structure (xiv) Other services and (xv) External transactions. The national income is estimated at both unremitting and current prices. 10.7 SUMMARY National income is the market value of all final goods and services produced in a country over a period of time, generally one year. In general, there are three important measures of national income, viz. , (i) GNP, (ii) GDP, and (iii) NNP. In measuring GNP, income earned abroad by the nationals is added and income earned by foreigners in the country is subtracted from national income estimates on the contrary, a reverse process is used in estimating GDP. NNP is defined as GNPDepreciation. Depreciation equals the loss of national capital in the process of production.There are three methods of measuring national income (i) Value-added method, (ii) factor-income method, and (iii) expenditure method. The choice of method depends on the availability of data required for estimating national income. Often two or all the three methods are combined to estimate national inc ome. In India, an organisation called CSO estimates the national income. It uses net output and factor income method for estimating national income. 304 Self-Instructional Material10. 8 ANSWERS TO CHECK YOUR PROGRESS1.National income is defined as the market value of all final goods and services produced during a period of time, usually one year.2. In general, three measures of national income are used in economic and business anaylsis (i) GNP, (ii) GDP, and (iii) NNP.3. The difference between GNP and GDP lies in the handling of income earned abroad by nationals and income earned by foreigner in the domestic economy. In measuring GNP, income abroad by nationals is added and income earned by foreigners in the country is deducted from the value estimated. In case of GDP, a reverse process is used.4. NNP means GNP less depreciation, i. e. , the value of national capital lost in the process national production.5. There are three methods of measuring national income (i) net product or va lue added method, (ii) factor income method, and (iii) expenditure method.6. Under value-added method, first gross value of national product is estimated. Then costs of material and services also depreciation are estimated. These costs are deducted from the gross value to arrive at national income.7. In general, factor income method follows the principle that national income = wages + rent + interest + profit. For estimating national income, however, factor incomes are classified as (i) labour income, (ii) capital income, and (iii) mixed income.8. The adjustment of income earned abroad depends on GNP and GDP estimation. In case of GNP, income earned abroad by the citizens of a country is added to the gross value. But in case of GDP, this is deducted from the gross value.10. 9 EXERCISES AND QUESTIONS1. What is the relevance of national income statistics in business decisions?What kinds of business decisions are influenced by the change in national income?2. Describe the various metho ds of measuring national income. How is a method chosen for measuring national income?3. Distinguish between net-product method and factor-income method. Which of these methods is followed in India?4. Does the method of measuring national income of a closed economy differ from one followed in an open economy? How is foreign income treated in national income estimates?5. What is value-added? Explain the value-added method of estimating national income.