As we know
that N.I is the aggregate money value of all the final goods and services
produced in a country during a year. It is the aggregate of all the annual
rewards paid to the factors of production for their productive services. It is
the aggregate of all the annual expenditure made by the people on consumer and
capital goods at home and abroad. In the light of these definitions N.I can be
determined by the following methods;
1)
Product Methods Or Output Methods
2)
Income Methods
3)
Expenditure Methods
v Product Method Or Output Methods: Under this method the N.I can be measured in two ways;
a)
Final Product Approach
b)
Value Added Approach
·
Final Product Approach: By this approach N.I can be measured
by adding the market value of all the final goods and services produced in a
year which is called GNP of that country and than subtract depreciation expense
from it to calculate NNP. Although in this approach the money value of all the
goods and services is same as the cost of production of these goods and
services. Therefore, NNP also represents NI, so can say that;
NNP = GNP – Depreciation Expense
§ The measurement of NI by final
product approach can be illustrated with the help of following table;
|
Goods and services |
Total Output |
Price/Unit |
Total Value |
|
Wheat |
200 ton |
Rs.1 million |
Rs.200 million |
|
Rice |
170 ton |
Rs.1 million |
Rs.170 million |
|
Coal |
150 ton |
Rs.1 million |
Rs.150 million |
|
Radio |
50 thousand |
Rs.100/unit |
Rs.5 million |
|
T.V Set |
25 thousand |
Rs.10,000/unit |
Rs.25 million |
|
Doctors |
50 thousand |
Rs.1 million/Doc |
Rs.50 million |
|
engineers |
30 thousand |
Rs.1 million/Engineer |
Rs.30 million |
|
GNP |
|
|
Rs.630 million |
|
Less: depreciation cost |
|
|
-60 million |
|
NNP |
|
|
Rs.570 million |
·
Value Added Approach: By this approach the economy is
divided into various sectors like agriculture mining, manufacturing, industry,
commerce etc. and GNP can be calculated by adding the net value of the final
goods and services produced in a year by each sector and then deduct
depreciation cost to calculate NNP or NI.
|
Names of sectors |
Total output |
Price/unit |
Total value |
|
Agriculture |
30,000 units |
Rs.10,000 |
Rs.300 million |
|
Mining |
10,000 units |
Rs.10,000 |
Rs.100 million |
|
Fishing |
2000 units |
Rs.10,000 |
Rs.20 million |
|
Industry |
50,000 units |
Rs.10,000 |
Rs.500 million |
|
Commerce |
2000 units |
Rs.10,000 |
Rs.20 million |
|
GNP |
|
|
Rs.940 million |
|
Less depreciation cost |
|
|
Rs.370 million |
|
NNP/NI |
|
|
Rs.570 million |
§ Precautions:
There are some precaution during the measurement of NI by product method. These
are given in the following:
1) Double Counting: During the adding of the value of various commodities we must care about
the final goods and services and intermediate goods. For the measurement of NI
always take the value of final goods rather then intermediate goods because
intermediate goods included in final goods and there is double counting which
increase the GNP from real GNP.
2) Depreciation Allowances: Depreciation allowances must be deducted from the GNP to
calculate NI. Because it is the allowance which is to be paid from the NI.
3) Deduction Of Indirect Taxes: The indirect taxes are also deduct from the price of goods
and services which have been imposed by the government on the sale of
commodities.
v Income Methods:
Under this method NI can be calculated by adding up the rewards of factors of
production like land, labor, capital and entrepreneur. NI can be calculated by
seaming up the following rewards of factors of production.
·
All
wages and salaries which the labors receive in a year. The compensations paid
to the workers are too included in it.
·
Rents
of all the lands, buildings and other properties which the owners receive in a
year as well as the rent of the houses in which the owner themselves leave.
·
All
types of interest receive by the investors during a year on capital bonds and
other loans.
·
Three
types of profit:
a) Corporate profit which is distributed
among shareholders e.g. dividend.
b) Corporate profit which is not
distributed among shareholders e.g. retained earnings
c) Profit of the self employed servants
like doctors, engineers, professors etc.
·
Corporate
profit taxes or indirect taxes which is paid to the government.
·
Contribution
for social securities which are made by the entrepreneurs from their profits.
From the above rewards it is conducted that according to income approach.
·
NI
= wages and salaries + interest + rents + profits + direct or indirect taxes +
social securities
|
S.NO |
Reward of factors of production |
Amount |
|
1 |
Wages and salaries |
Rs.150 million |
|
2 |
Rent of properties |
Rs.120 million |
|
3 |
Interest on capital |
Rs.100 million |
|
4 |
Profits: dividend |
Rs.75 million |
|
|
Retained earnings |
Rs.25 million |
|
|
Profit of self employed |
Rs.30 million |
|
|
Total profit |
Rs.130 million |
|
5 |
Direct and indirect taxes |
Rs.50 million |
|
6 |
Contribution for social securities |
Rs.20 million |
|
|
National income |
Rs.570 million |
§ Precautions:
During the calculation of NI by income approach following points should be kept
in mind.
a) Transfer Payments: The transfer payments like pensions, gifts and scholarship should not be
included in the national income because these are already calculated.
b) Illegal Earnings: Illegal earnings like bribery and earning from smuggling should no be
included in NI.
v Expenditure Methods: With the help of expenditure method NI can be calculated by adding up
all the expenditures which are made by the government and individuals on the
capital and consumer goods within one year at home or abroad. Economist
calculate NI of any country by adding up the following expenditures.
1)
Personal consumption expenditure.
2)
Gross domestic private investment
3)
Gross domestic public investment
4)
Government expenditure on goods and
services
5)
Export surplus
6)
Net foreign investment
·
The
total of expenditures is the GNP of any country. By subtracting depreciation
cost NNP will be calculated and in order to calculate NI government subsidies
are added up with NNP and indirect taxes and transfer payments are subtracted
from NNP. The measurement of NI by the expenditure approach is given in the
table:
|
S.NO |
Expenditures |
Amount |
|
1 |
Personal consumption expenditure |
Rs.200 million |
|
2 |
Gross domestic private investment |
Rs.70 million |
|
3 |
Gross domestic public investment |
Rs.50 million |
|
4 |
Government expenditures on goods and
services |
Rs.100 million |
|
5 |
Export surplus |
Rs.50 million |
|
6 |
Net foreign investment |
Rs.20 million |
|
|
GNP |
Rs.490 million |
|
|
Less: depreciation cost |
-30 million |
|
|
NNP |
Rs.460 million |
|
|
Add: government subsidies |
Rs.200 million |
|
|
Subtotal |
Rs.660 million |
|
|
Less: indirect taxes |
Rs.60 million |
|
|
Transfer payments |
Rs.30 million |
|
|
|
Rs.90 million |
|
|
National income |
Rs.570 million |
§ Precautions:
Under this approach following points to be kept in mind.
1) Government Subsidies: Government subsidies should be added with NNP to calculate NI.
2) Indirect Taxes:
Indirect taxes like sales tax and excise duty should be deducted from the mist
price of goods for which the expenditures are made.
3) Transfer Payments: Transfer payments should also be deducted from NI.