Different Ways of Measuring National Income and their Problems
1. Income Approach:
This is the sum total of all earnings by the factors of production in business organizations, government, and its agencies. This approach is concerned with the income earned for goods produced or services rendered. Note that, transfer payments (pension, gift, unemployment benefits) i.e. payment made without producing goods or rendering services are not included.
Using the income approach, the National Income = Wages + Salary + Interest + Rent + Net Income from aboard – Transfer payments.
This approach has certain limitations in use
(i) Inadequate data on income of individual and firm.
(ii) Widespread tax evasion.
(iii) Unwillingness of individuals and companies to make accurate returns on their earnings.
(iv) Failure of many illiterate businessmen to keep any account.
2. Output Approach
The output or product approach involves the summation of the values of all the final products and services produced within an economy during the year.
This means the cost of raw materials and other purchases must be subtracted from the total sales or revenue in order to avoid double counting.
The output approach focuses only on its value-added for all firms, private individuals, government, and its agencies (Value added = Gross – Output – less government purchases of raw materials).
Net exports are taken into consideration which is total export less total import.
Limitation of Product Approach in National Income
(a) Substantial part of the population operates in the subsistent sector of the economy. (It’s where most goods are consumed by the households).
(b) Some goods are smuggled into the country.
This method involves the addition of all expenditures on consumer and investment goods as well as goods and services purchased by the government on behalf of the public. It is the total amount spent on consumption and investment purposes during the year. To avoid double-counting, only final expenditures are calculated. Subsidies paid by the government to business organizations and indirect taxes are added when national income or Gross National Product is calculated at factor cost.
GNP = C + I + G + (X – M)
C = Private consumption expenditure
I = Private investment expenditure
G = Government expenditure on consumption and investment.
X = Exports
M = Imports
Interest paid by the government on public debts and transfer payments must be excluded from national income figures.
GNP = C + I + G + (X – M) – Interests