The concept of national income is linked to the society as a whole. . But, the total output or income of society does not increase in the process. Now, at find stage, we add up the value of the net value added of all the last of all the three sector and at last of all the three sectors. Non-economic activities include spiritual, psychological, social and political services. National income estimates provide valuable information and guidance for formulating the economic plans.
There is a sort of transfer of money from tax-payers to the people receiving pensions. This is why when we add up the values of all sales, the same output is counted again and again as it is sold by one firm to another. This is acceptable to economists, because, like income, the total value of all goods is equal to the total amount of money spent on goods. In this method total national expenditure is the sum of expenditure incurred by the society in a particular year. Certain other categories of income such as incomes from incidental jobs, gratuities and tips are ignored because of non-availability of data. Following a suitable method, deductible costs including depreciation are estimated for each sector.
For example, many teachers teach their own children, farmers produce food for themselves and many people drive their own cars, and many people even make their own clothes. In common parlance, national income means the total value of goods and services produced annually in a country. Primarily there are three methods of measuring national income. Also, expenditure done on second hand goods and bonds and shares must not be included in national income as they cause error in actual value of national income. Which of these methods is followed in India? Then costs of material and services also depreciation are estimated. But, these undistributed surpluses must be added on to the total of factor incomes received by persons to arrive at national income. There are four different method of measuring national income.
The expenditure made by foreigners on goods and services of a country exported to other countries which arc called exports and are denoted by X We deduct from exports X the expenditure by people, enterprises and government of a country on imports M of goods and services from other countries. Therefore, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs including undistributed corporate profits and incomes of self-employed people. Such incomes are termed as mixed incomes. This is known as rounding-up error or residual error, i. And to this, must be added income from abroad.
Illegal money such as hawala money, money earned through smuggling etc. Measurement of gross value of domestic output in the various branches of production: For measuring the gross value of domestic product, output is classified under various categories on the basis of the nature of activities from which they originate. These are also called nominal prices. This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, owners of capital, workers, entrepreneurs. Thus, national income may also be obtained by adding the factor earnings and adjusting the sum for indirect taxes and subsidies. If identical goods and services are sold in the market place it is possible to give self-provided goods and services an imputed valuation — an estimate of their values can be included in the national income figures.
Now, we have added up the net factor income from abroad and got the Net National Income at Factor Cost or the National Income. In India, for example, 1980-81 is taken as the base year. Economic welfare depends to a considerable degree on the level of national income and the average standard of living of the people. A preferable alternative is to total the values added at each stage of production. Further, people of foreign countries spend on the goods and services which a country exports to them.
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. We need not measure their actual consumption that occurs during the year or any other period under consideration. Real takes into account inflation. Government consumption expenditure, gross capital formation Government and private and net exports Export-Import. The non-economic category of activities also includes hobbies, service to self, services of housewives, services of members of family to other members and exchange of mutual services between neighbours.
Government Expenditure: Money that government spends falls into two categories, one is called transfer payments. Changes in price level : National income estimates also reveal the facts regarding the changes in price level. On this basis, national income has been defined in a number of ways. Which method is to be employed depends on the availability of data and purpose. Their sum gives an alternative way of calculating the value of final output.
Inadequacy, non-availability and unreliability of statistics is a great handicap in measuring national income in these countries. The Value Added Method In the value added method of measuring national income, the value of materials added by producers at each stage of production to produce the final good is considered. These are money paid out for which nothing is given back to the government. The net incomes earned by the factors of production in the form of rent, wage, interest and profit aggregated but incomes in the form of transfer payments are not included in the national income. The secondary sector involves producing units that transforms inputs into output, that is, wood in chair, milk into its sub products etc. These income components sum to net domestic income at factor cost.
In our example, tyres and tubes, glass, steel, electricity were all intermediate goods used at various stages in the production process while cars were final goods. These factors of production get remuneration known as rent, wage, interest and profit respectively. The items of expenditure which are taken into account under the first method are a Private consumption expenditure, b Direct tax payments, c Payment to the n and charitable organisations like schools, hospitals and orphanage, and d Private savings. The boundary is usually defined by geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods and services that are counted. This creates a problem in the sense that there is need to record as part of current output and income the profits that will be received by the firm only when, and if at all, the goods are sold.