1.Value Added Method:
This method is used to measure national income in different phases of production in the circular flow. It shows the contribution (value added) of each producing unit in the production process.
- Every individual enterprise adds certain value to the products, which it purchases from some other firm as intermediate goods.
- When value added by each and every individual firm is summed up, we get the value of national income.
Value added Method is also known as:
- Product Method;
- Inventory Method;
- Net Output Method;
- Industrial Origin Method; and
- Commodity Service Method.
Concept of Value Added:
Value added refers to the addition of value to the raw material (intermediate goods) by a firm, by virtue of its productive activities. It is the contribution of an enterprise to the current flow of goods and services. It is calculated as the difference between value of output and value of intermediate consumption.
Value Added = Value of Output – Intermediate Consumption
Example of Concept of Value Added:
Suppose a baker needs only flour to produce bread. He purchases flour as inputs worth? 500 from the miller and then by virtue of its productive activities, converts the flour into bread and sells the bread for Rs. 700.
In the given example:
1. Flour is an input (Intermediate goods) and its value of Rs. 500 are termed as value of ‘Intermediate Consumption’.
2. Bread is the Output and its value of Rs. 700 are termed as ‘Value of Output’.
3. Difference between the value of output and intermediate consumption is termed as ‘Value Added’. It means, that the baker has added a value of Rs. 200 to the total flow of final goods and services in the economy.
4. Value added by each producing enterprise is also known as the Gross Value Added at Market price (GVAMP). It means, value added by baker 200) can be termed either as Value added or GVAMP.
5. GDFMP (Gross Domestic Product at Market Price), i.e. ∑GVAMP = GDPMP.
2.Factor Income Method:
This method is also known as income method and factor-share method. Under this method, the national income is calculated by adding up all the “incomes accruing to the basic factors of production used in producing the national product”. Factors of production are conventionally classified as land, labour, capital and organization. Accordingly, the national income equals the sum of the corresponding factor earning. Thus, National income = Rent + Wages + Interest + Profit .
However, in a modern economy, it is conceptually very difficult to make a distinction between earnings from land and capital, on the one hand, and between the earnings from ordinary labour and entrepreneurial functions, on the other. For the purpose of estimating national income, therefore, factors of production are broadly grouped as labour and capital. Accordingly, national income is supposed to originate from two primary factors, viz., labour and capital. In some activities, however, labour and capital are jointly supplied and it is difficult to separate the labour and capital contents from the total earnings of the supplier. Such incomes are termed as mixed incomes. Thus, the total factor-incomes are grouped under three categories: (i) labour incomes; (ii) capital incomes; and (iii) mixed incomes.
Labour Incomes: Labour incomes included in the national income have three components: (a) wages and salaries paid to the residents of the country including bonus and commission, and social security payments; (b) supplementary labour incomes including employer’s contribution to social security and employee’s welfare funds, and direct pension payments to retired employees ; (c) supplementary labour incomes in kind, e.g., free health and education, food and clothing, and accommodation, etc.
Capital Incomes: According to Studenski, capital incomes include the following capital earnings:
- dividends excluding inter-corporate dividends;
- undistributed before-tax profits of corporations;
- interest on bonds, mortgages, and saving deposits (excluding interests on war bonds, and on consumer-credit);
- interest earned by insurance companies and credited to the insurance policy reserves; net interest paid out by commercial banks;
- net rents from land, buildings, etc., including imputed net rents on owner occupied dwellings;
- royalties; and
- profits of government enterprises.
Mixed Income: Mixed incomes include earnings from
- farming enterprises,
- sole proprietorship (not included under profit or capital income); and
- other professions, e.g., legal and medical practices, consultancy services, trading and transporting etc.
This category also includes the incomes of those who earn their living through various sources as wages, rent on own property, interest on own capital, etc. All the three kinds of incomes, viz., labour incomes, capital incomes and mixed incomes added together give the measure of national income by factor-income method.
3. Expenditure Method:
The expenditure method, also known as final product method, measures national income at the final expenditure stages. In estimating the total national expenditure, any of the two following methods are followed: first, all the money expenditures at market price are computed and added up together, and second, the value of all the products finally disposed of are computed and added up, to arrive at the total national expenditure. The items of expenditure which are taken into account under the first method are (a) private consumption expenditure; (b) direct tax payments; (c) payments to the non-profitmaking institutions and charitable organizations like schools, hospitals, orphanages, etc.; and (d) private savings. Under the second method, the following items are considered: (a) private consumer goods and services; (b) private investment goods; (c) public goods and services; and (d) net investment abroad. The second method is more extensively used because the data required in this method can be collected with greater ease and accuracy.
Treatment of Net Income from Abroad:
We have so far discussed methods of measuring national income of a ‘closed economy’. But most economies are open in the sense that they carry out foreign trade in goods and services and financial transactions with the rest of the world. In the process, some nations get net income through foreign trade while some lose their income to foreigners. The net earnings or loss in foreign trade affects the national income. In measuring the national income, therefore, the net result of external transactions are adjusted to the total. Net incomes from abroad are added to, and net losses to the foreigners are deducted from the total national income arrived at through any of the above three methods. Briefly, speaking, all exports of merchandise and of services like shipping, insurance, banking, tourism, and gifts are added to the national income. And, all the imports of the corresponding items are deducted from the value of national output to arrive at the approximate measure of national income. To this is added the net income from foreign investment. These adjustments for international transactions are based on the international balance of payments of the nations.
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