National income and its measurement
Objective :)
Define national income.
Look at national income from three different angles.
Explain the classification of production unit located in the economic territory of a country into
different industrial sectors.
Explain the meaning of the primary, secondary and tertiary sectors.
Explain the production method of measuring national income.
Explain the precautions to be taken while measuring national income by production method.
Explain the income distribution method of measuring national income.
Explain the precautions to be taken while measuring national income by income distribution method.
Explain the final expenditure method of measuring national income.
Explain the precautions to be taken while measuring national income by final expenditure method.
Show that all the three methods of measuring nationa income lead to the same result.
Points to remember :)
The main steps involved in the measurement of national income through the value added approach is to
classify the production units into the industrial sectors, estimate net value added at factor cost
by each sector and add net factor income from abroad.
Main precautions in the value added approach are : avoid doube counting, include output produced for
self consumption, and not to include sale of second hand goods.
The main steps in the income distribution method are : classify production units into industrial
sectors, estimate factor income paid out by each sector and add net factor income from abroad.
The main precautions in the income distribution method are: include all cash and kind benefits to
emplyees in compensation of employees, include only that interest payment which is made against
loan taken for production, and not to include transfer income in the form of gifts, donations, taxes
etc.
The main steps in the final expenditure method are estimate final expenditure on consumption and
investment, deduct consumption of fixed capital and indirect taxes, add subsidies, and net factor
income from abroad.
The main precautions in the final expenditure method are don't include intermediate, don't include
transfer expenditure on gifts, donations, taxes, etc and don't include expenditure on second hand
goods.
What you have learnt :)
There are three phases of circular flow of national income. Accordinly there are three methods of
measurement of national income : value added or production method, income distribution method and
final expenditure method.
The first step in the measurement of national income of a country is to classify its production
units into different industrial sectors. The primary sector includes all units engaged in exploitting
natural resources. The secondary sector transforms one good into another good. The production units inthe
services produce services.
The main steps in the value added method are estimate NVAfc by all sectors and add them to arrive
at NDPfc. Add net factor income from abroad to NDPfc to obtain NNPfc.
The main steps in the income distribution method are : estimate factor incomes paid out by each
sector, take the sum of these incomes paid out by all the sectors to get, NDPfc, add net factor income
from abroad to get NNPfc.
The main steps in the final expenditure method are : estimate the sum of final expenditure on
consumption and investment to get GDPmp, deduct consumption of fixed capital and indirect taxes and
add subsidies to GDPmp to arrive at NDPfc and add net factor income from abroad to NDPfc to get
NNPfc.
Terminal exercise
(1)Explain the three phases of circular flow of national income.
(2)Explain the nature of functions of primary, secondary and tertiary sectors.
(3)Explain the steps taken in measuring national income through the value added method.
(4)What are the main precautions required to be taken in estimating national income by the value
added method?
(5)Explain the steps involved in estimating national income through the income distribution method.
(6)What are the main precautions required to be taken in estimating national income by the income
distribution method?
(7)What are the main steps in the expenditure method of estimating national income?
(8) Point out some of the precautions taken in estimating national income through the final expenditure
method?
Define national income.
Look at national income from three different angles.
Explain the classification of production unit located in the economic territory of a country into
different industrial sectors.
Explain the meaning of the primary, secondary and tertiary sectors.
Explain the production method of measuring national income.
Explain the precautions to be taken while measuring national income by production method.
Explain the income distribution method of measuring national income.
Explain the precautions to be taken while measuring national income by income distribution method.
Explain the final expenditure method of measuring national income.
Explain the precautions to be taken while measuring national income by final expenditure method.
Show that all the three methods of measuring nationa income lead to the same result.
Points to remember :)
The main steps involved in the measurement of national income through the value added approach is to
classify the production units into the industrial sectors, estimate net value added at factor cost
by each sector and add net factor income from abroad.
Main precautions in the value added approach are : avoid doube counting, include output produced for
self consumption, and not to include sale of second hand goods.
The main steps in the income distribution method are : classify production units into industrial
sectors, estimate factor income paid out by each sector and add net factor income from abroad.
The main precautions in the income distribution method are: include all cash and kind benefits to
emplyees in compensation of employees, include only that interest payment which is made against
loan taken for production, and not to include transfer income in the form of gifts, donations, taxes
etc.
The main steps in the final expenditure method are estimate final expenditure on consumption and
investment, deduct consumption of fixed capital and indirect taxes, add subsidies, and net factor
income from abroad.
The main precautions in the final expenditure method are don't include intermediate, don't include
transfer expenditure on gifts, donations, taxes, etc and don't include expenditure on second hand
goods.
What you have learnt :)
There are three phases of circular flow of national income. Accordinly there are three methods of
measurement of national income : value added or production method, income distribution method and
final expenditure method.
The first step in the measurement of national income of a country is to classify its production
units into different industrial sectors. The primary sector includes all units engaged in exploitting
natural resources. The secondary sector transforms one good into another good. The production units inthe
services produce services.
The main steps in the value added method are estimate NVAfc by all sectors and add them to arrive
at NDPfc. Add net factor income from abroad to NDPfc to obtain NNPfc.
The main steps in the income distribution method are : estimate factor incomes paid out by each
sector, take the sum of these incomes paid out by all the sectors to get, NDPfc, add net factor income
from abroad to get NNPfc.
The main steps in the final expenditure method are : estimate the sum of final expenditure on
consumption and investment to get GDPmp, deduct consumption of fixed capital and indirect taxes and
add subsidies to GDPmp to arrive at NDPfc and add net factor income from abroad to NDPfc to get
NNPfc.
Terminal exercise
(1)Explain the three phases of circular flow of national income.
(2)Explain the nature of functions of primary, secondary and tertiary sectors.
(3)Explain the steps taken in measuring national income through the value added method.
(4)What are the main precautions required to be taken in estimating national income by the value
added method?
(5)Explain the steps involved in estimating national income through the income distribution method.
(6)What are the main precautions required to be taken in estimating national income by the income
distribution method?
(7)What are the main steps in the expenditure method of estimating national income?
(8) Point out some of the precautions taken in estimating national income through the final expenditure
method?
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