National income, product method, value added, expenditure and income methods

1. Measurement of NYMeasurement of NY
Prof. Prabha Panth,

2. 19 Jul 2013 2
There are three methods to measure
NY.
1) Output or Product Method,
2) Income Method,
3) Expenditure Method
In theory they should all give the
same result, because Total
expenditure = total income = value
of total output.

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1. The Product Method:1. The Product Method:
 NY is the aggregate money value of the
net yearly flow of final goods and services
in the economy.
 This method gives GDP at market prices.
 In this method, the value of only final
goods and services of one year is taken.
 All intermediate goods and services are
excluded,
 Using Value Added method, double
counting can be avoided.

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Example:Example:
Item Rs.
Wheat 10 a KG
Flour 12 a KG
Bread 15
Total 37
Item Rs. Value
added
Wheat 10 a KG
Flour 2
Bread 3
Total 15

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 Capital gains have to be excluded.
 Depreciation has to be excluded.
 Many goods and services are not
marketed, but self consumed.
 Agriculture,
 Self occupied houses,
 Does not include incomes earned from
abroad.
 Subsidies should be added and indirect
taxes deducted to get NY.

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2. The Income Method:2. The Income Method:
 NY is the sum of all incomes in an
economy.
 NY = Wages and salaries + Corporate
profits + Rent + Interest
But does not include:
Incomes of Indians living abroad,
Self employed,
This method gives NY at factor cost, after
adjusting for above.

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3. Expenditure Method:3. Expenditure Method:
 GDP = sum of all expenditures of the four
sectors.
 HH expenditure + Firms’ expenditure +
Gov expenditure + (Exports – Imports) =
GDP at market prices.
 But following adjustments to be made:
 Include value of unsold goods (added to
inventory)
 Second hand sales to be excluded.
 Depreciation to be deducted.

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 Actually all three methods are used:
 For services – Income method is used.
 For Government – expenditure method.
 For Firms’ and Foreign sector – product
method.
 Necessary to have proper statistics
 Proper accounting procedures.