Question

What do you understand by National Income ? Explain the production method of its estimation.

Hint:

The key to the production method is the concept of "Value Added" to avoid the problem of double-counting. Remember the journey from GDP\textsubscript{MP} to NNP\textsubscript{FC}: Subtract depreciation, subtract net indirect taxes, and add net factor income from abroad.

Answer 1

National Income is the total money value of all final goods and services produced by the normal residents of a country in a financial year. It is the sum total of factor incomes (rent, wages, interest, and profit) earned by the normal residents of a country during an accounting year. National Income is represented by Net National Product at Factor Cost (NNPFC). It is a key indicator of a country’s economic performance and health.

Production Method (or Value Added Method):

The production method measures national income by calculating the total value added at each stage of production. It involves summing up the Gross Value Added (GVA) by all producing enterprises within the domestic territory of a country during a year. This sum gives the Gross Domestic Product at Market Price (GDPMP).

Steps for Estimation:

1. Identify and Classify Production Units: All producing enterprises are classified into three main sectors:
   • Primary Sector: Agriculture, forestry, fishing, mining.
   • Secondary Sector: Manufacturing, construction, electricity, gas, and water supply.
   • Tertiary Sector: Services like trade, transport, banking, and public administration.
2. Calculate Gross Value Added (GVA): For each sector, GVA is calculated by subtracting the value of intermediate consumption from the value of output.

\[ \text{GVA} = \text{Value of Output} - \text{Intermediate Consumption} \]

Where, \(\text{Value of Output} = \text{Sales} + \text{Change in Stock (Closing Stock − Opening Stock)}\).

1. Calculate Gross Domestic Product at Market Price (GDPMP): The GVA of all three sectors is summed up to get GDPMP.

\[ \text{GDPMP} = \text{GVA of all sectors} \]

1. Calculate National Income (NNPFC): To arrive at National Income, we make the following adjustments to GDPMP:

\[ \text{National Income (NNPFC)} = \text{GDPMP} - \text{Depreciation} - \text{Net Indirect Taxes (NIT)} + \text{Net Factor Income from Abroad (NFIA)} \]

Where, \(\text{NIT} = \text{Indirect Taxes} - \text{Subsidies}\).

Precautions:

• Avoid Double Counting: The value of intermediate goods should not be included; only the value of final goods or the value added at each stage should be considered.
• Inclusion of Self-Consumption: Production of goods for self-consumption should be included in the estimation.
• Exclusion of Second-Hand Goods: The sale and purchase of second-hand goods are not included as they were part of the production in a previous year. However, any commission earned on such sales is included.
• Imputed Value: The imputed rent of owner-occupied houses should be included.