Methods of Calculating National Income | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year PDF Download

Introduction

The National Income stands as a pivotal gauge of a nation's economic well-being and advancement. It measures the aggregate value of all goods and services generated within the country's confines over a defined timeframe. To precisely assess this economic metric, economists utilize diverse methods, each providing a distinct vantage point on economic activity. 

How is National Income Calculated?

• After depreciation, the total value of final products and services produced by normal residents throughout an accounting year is termed national income.

• Goods and services are generally produced by production units, utilizing four factors of production: land, labor, capital, and entrepreneurship.

• These four factors work together to create goods and services, adding value to existing products.

• The additional value, or net domestic product, is dispersed among the owners of the four production components, who receive rent, employee compensation, interest, and profit for their contribution.

• Profits earned by the owners of the factors of production are used to acquire goods and services from the production units for consumption and investment.

• In essence, manufacturing generates revenue, and income is utilized to fund spending. Subsequently, spending fuels more production.

• The circular flow of national income encompasses three phases: Production, Income, and Expenditure.

Methods of Calculating National Income

• The three methods of calculating national income are:
  • Value Added Method
  • Income Method
  • Expenditure Method
• To enhance accuracy and comprehensiveness, economists often combine two or more methods to calculate National Income.
• This triangulation helps mitigate the limitations of individual methods and provides a more accurate depiction of an economy's performance.

What is Value Added Method?