Question

Following data is related to an economy. On the basis of these data calculate National Income of that economy: Wages: 1000, Rent: 400, Interest: 50, Dividend: 300, Mixed Income: 250. (Amounts in Crore Rupees).
OR
Describe the Product method of estimation of National Income.

Hint:

The key to the Product/Value Added method is to subtract intermediate consumption to avoid double counting. Remember you are measuring the value added at each stage of production, not the total sales value.

Answer 1

Step 1: Understanding the Concept and Method:
The given data consists of factor incomes (Wages, Rent, Interest) and profits (Dividend is a part of profit), along with Mixed Income. This indicates that we must use the Income Method to calculate National Income.
The Income Method calculates the Net Domestic Product at Factor Cost (NDP at FC) by summing up all the factor incomes generated within the domestic territory of a country.
National Income is Net National Product at Factor Cost (NNP at FC). Assuming Net Factor Income from Abroad (NFIA) is zero, NDP at FC will be equal to NNP at FC.

Step 2: Formula for Income Method:
NDP at FC = Compensation of Employees + Rent and Royalty + Interest + Profit + Mixed Income.
\begin{itemize} \item Compensation of Employees includes wages and salaries. \item Profit includes dividends, corporate tax, and undistributed profits. \end{itemize}

Step 3: Identifying Components and Calculating:
From the given data: \begin{itemize} \item Wages (Compensation of Employees) = Rupees 1000 Crore \item Rent = Rupees 400 Crore \item Interest = Rupees 50 Crore \item Profit (only Dividend is given, so we take that as the profit component) = Rupees 300 Crore \item Mixed Income = Rupees 250 Crore \end{itemize} Now, sum up these components: \[ \text{NDP at FC} = \text{Wages} + \text{Rent} + \text{Interest} + \text{Dividend} + \text{Mixed Income} \] \[ \text{NDP at FC} = 1000 + 400 + 50 + 300 + 250 \] \[ \text{NDP at FC} = \text{Rupees 2000 Crore} \]

Step 4: Final Answer:
Since no information about Net Factor Income from Abroad (NFIA) is given, we assume it to be zero. Therefore, National Income (NNP at FC) = NDP at FC = Rupees 2000 Crore.
The National Income of the economy is Rupees 2000 Crore.
Solution (Product Method of Estimating National Income):

Step 1: Meaning of the Product Method:
The Product Method, also known as the Value Added Method or Output Method, is a way of calculating National Income by measuring the contribution of each producing enterprise to the production in the domestic territory of the country in a year. It estimates the money value of all final goods and services produced.

Step 2: The Concept of Value Added:
To avoid the problem of double counting (i.e., counting the value of the same good multiple times), this method sums up the 'Value Added' by each firm. Value Added is the difference between the value of a firm's output and the value of intermediate inputs it purchased from other firms. \[ \text{Value Added} = \text{Value of Output} - \text{Intermediate Consumption} \] Where: \begin{itemize} \item Value of Output = Sales + Change in Stock \item Change in Stock = Closing Stock - Opening Stock \end{itemize}

Step 3: Steps for Estimation:
The estimation of National Income using this method involves the following steps: \begin{enumerate} \item Identify and Classify Producing Units: All producing enterprises in the domestic economy are identified and classified into three sectors: Primary (agriculture, etc.), Secondary (manufacturing, etc.), and Tertiary (services, etc.). \item Calculate Gross Value Added at Market Price (GVA at MP): For each sector, the GVA at MP is calculated by summing up the value added by all firms in that sector. \item Calculate Gross Domestic Product at Market Price (GDP at MP): The GVA at MP of all three sectors is summed up to get the GDP at MP. \[ GDP_{MP} = \sum GVA_{MP} \text{ of all sectors} \] \item Calculate National Income (NNP at FC): To arrive at National Income (NNP at FC) from GDP at MP, the following adjustments are made: \[ NNP_{FC} = GDP_{MP} - \text{Depreciation} - \text{Net Indirect Taxes} + \text{Net Factor Income from Abroad (NFIA)} \] \end{enumerate}

Step 4: Final Answer:
The Product method measures national income by summing up the net value added by all producing units within the economy. It involves calculating GDP at MP first and then making necessary adjustments for depreciation, indirect taxes, subsidies, and net factor income from abroad to arrive at National Income.