Measurement of National Income
There are three ways of measuring the National Income of a country. They are from the income side, the output side and the expenditure side. Thus, we can classify these perspectives into the following methods of measurement of National Income.
Methods of Measuring National Income
1. Product Method
Under this method, we add the values of output produced or services rendered by the different sectors of the economy during the year in order to calculate the National Income. In this method, we include only the value added by each firm in the production process in the output figure.
2. Income Method
Under this method, we add all the incomes from employment and ownership of assets before taxation received from all the production activities in an economy.
3. Expenditure Method
This method measures the total domestic expenditure of the economy. It consists of two elements, viz. Consumption expenditure and Investment expenditure. Consumption expenditure includes consumption expenditure of the household sector on goods and services and consumption outlays of the business sector and public authorities.
Difficulties in Measurement of National Income:
a. Conceptual difficulties
b. Statistical difficulties
A. Conceptual difficulties
It is difficult to calculate the value of some of the items such as services rendered for free and goods that are to be sold but are used for self-consumption.
Sometimes, it becomes difficult to make a clear distinction between primary, intermediate and final goods.
What price to choose to determine the monetary value of National Product is always a difficult question?
Whether to include the income of the foreign companies in the National Income or not because they emit a major part of their income outside India?
B. Statistical difficulties
In case of changes in the price level, we need to use the Index numbers which have their own inherent limitations.
Statistical figures are not always accurate as they are based on the sample surveys. Also, all the data are not often available.
All the countries have different methods of estimating National Income. Thus, it is not easily comparable.