Chapter 4 Measurements Of National Income
value added Method (GVAmp)
Meaning: Refers to the addition of value to the raw material(intermediate goods) by a firm, by virtue of its productive activities.Formula:
GVAmp = Value of output - Intermediate Consumption
= (Sales + Change in stock) - Intermediate Consumption
* Sales = Domestic Sales + Exports
* Change in Stock = Closing Stock - Opening Stock
* Addition to Stock = 10 Means +10
* Reduction in Stock = 10 Means -10
* Intermediate Consumption = Domestic Purchase of Raw Material + Import of Raw Material
* Do not include Import of Machinery (Final Good)
* Include Production for self Consumption
Steps Of Value Added Method:
* Identify all the producing units in the economy.
* Classify these producing units into primary secondary & tertiary sector.
* Calculate value of output of all the three sectors (sales + change in stock)
* Calculate intermediate consumption of all the three sector.
* subtract intermediate consumption from value of output & we get GVAmp or GDPmp.
* Now subtract Depreciation, Add NFIA & subtract NIT to get national Income.
Precautions to be taken while calculating NNPfc:
* Intermediate goods are not to be included: Since such goods are already included in the value or final goods. If they are included again, It will head to double counting.
* Sale and purchase of second-hand goods is not included: as they were included in the year in which they were produced and do not add to current flow of goods and services.
However, any brokerage on sale of or purchase of such goods will be included in the national as it is a productive service.
* Production services for self-Consumption are not included: Domestic services like services of a housewife, kitchen garding are not included in national income. Since it is difficult to measure their market value.
* Production of goods for self consumption will be included: as they contribute to the current output. They value is to be estimated or imputed as they are not sold in the market.
* Imputed value of owner-occupied house should be included: people who live in their own houses, do not pay any rent. but they enjoy housing services similar to those people who stay in rented houses. therefore value of such housing service is estimated according to market rent of similar accommodation.
* Change in stock of goods will be included: Net in the stock of inventories will be included in the national income as it is a part of capital information.
Income Method( NDPfc)
Meaning: According to this method, all the incomes that accrue to the factors of production by way of wages, profit, rent, interest, etc. are summed up to obtain the national income.Formula:
1. Compensation of Employees/ Remuneration of Employees
If Compensation of Employees Or Remuneration of Employees not given then find these
*Wages & salaries in cash
*Wages & salaries in kind
* ER's contribution to SSS
2. Operating surplus = Rent & Royalty + Interest + Profit
If Profit no given then find these substitutes
* Corporate Tax
* Dividends
* Corporate savings
* Net Retained Earnings
* Undistributed Profits
3. Mixed Income of self Employed
NDPfc: 1 + 2 + 3
Steps of Income Method:-
1. Identify all the producing units in the economy.
2. Classify these producing units into primary secondary and tertiary sector.
3. Calculate Compensation of employees.
4. calculate operating surplus.
5. Calculate mixed Income of self employed.
6. Add compensation of employees + Operating surplus + Mixed income of self employed to get NDPfc.
7. Add NFIA to get NNPfc.
Precautions to be taken while calculating Income method:-
1. Do not include transfer Income.
2. Do not include value of second hand goods.
3. Do not include financial transactions like selling & purchasing of shares.
4. Do not include illegal incomes.
5.Imputed rent of Owner Occupied houses is included.
6. Indirect Tax ( Sales tax, excise tax, custom duty, etc.) are not included in national income at factor cost.
7. Payments out of past savings( death duties, gift tax, interest tax, etc.) are not included in the national income.
Expenditure Method (GDPmp)
Meaning: This method measures national income as sum total of final expenditures incurred by households, business firms, government and foreigners.This method is also known as 'Income Disposal Method'.
Formula:
1. Household/ Personal/ Private Final Consumption Expenditure.
2. Government final Consumption Expenditure/ Government Purchases goods & Services.
3. Gross Domestic Capital Formation
(if this is not given then find these given below (a) & (b))
a. Gross Domestic Fixed Capital Formation
* Residential construction Investment.
* Public Investment
* Business Fixed Investment
b. Change in Stock/ Inventory Investment
4. Net Export(export - Import)
GDPmp = 1 + 2 + 3 + 4
Steps Of Expenditure Method:-
1. Identify all the producing units in the economy.
2. Classify these producing units into primary secondary and tertiary sector.
3. Calculate personal/ private/ household final consumption expenditure.
4. Calculate government final consumption expenditure or govt. purchases of goods & services.
5. calculate gross Domestic capital formation/ Investment.
6. For calculating gross domestic capital formation:
a. Calculate gross domestic fixed capital formation by adding business fixed Investment + Public Investment + Residential construction Investment &
b. then calculate change in stock (Closing stock - opening stock) & then add (a) to get gross domestic capital formation.
7. Calculate Net Export (Exports - Imports)
8. By adding all we get GDPmp.
9. Now subtract depreciation, add NFIA & subtract NIT to get National Income.
Precautions to be taken while calculating expenditure Method:-
1. Do not include Intermediate Expenditure.2. Do not included transfer payments.
3. Do not include expenditure done on feeding beggars.
4. Do not include expenditure done on second hand goods.
5. Purchase of financial assets( shares, debentures, bonds etc) will not be included.
6. Expenditure on own account production( like production for self-consumption) will be included in the national income.
Question 1. Explain the problem of double counting.
Answers: Double counting refers to the problem of counting the same value again & again which unnecessarily raises the price of the commodity value added method takes into consideration only the value addition done at every stage of production, because that is the actual income generated in the economy.
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