In stage two, the value added by the millers equals the sale of flour less the cost of wheat, depreciation on equipment and other expenses. Similarly, the sale and purchase of old stocks, shares, and bonds of companies are not included in national income because they were included in national income when the companies were started for the first time. He might be contributing his capital, land, labour and his abilities in the business. Thus the total national income is the total national expenditure. So, to avoid duplication, the value of intermediate products used in manufacturing final products must be subtracted from the value of total output of each industry in the economy. But as they satisfy human wants and receive payments for their services, their services are included as final goods in estimating national income.
However, the balance of payments must be deducted from or added to the national income, C. These goods are termed as intermediate goods and are already included while determining the value of final goods. Financial transactions and sales of old property including land are to be excluded, as they do not add anything to the real national income. Net value added at factor cost is equal to the net domestic product at factor cost, as given by the total of items 1 to 4 of Table 2 Rs. Imputed rent values of self-occupied houses should be included in the value of output. According to this method the monetary value of all the final national output in a year is.
In the value of final goods, value of intermediate goods is already included therefore we do not count value of intermediate goods in national income otherwise there will be double counting of value of goods. The receipts from the sale of second-hand goods should not be treated as a part of national income. It includes payments made to all resources in the form of wages, interest, rent and profits. There is often no sector by sector breakdown, variations and linkages among components exist, it is difficult to measure and some of the measures can only be guesswork. The pizza has many ingredients at different stages of the supply chain, for example tomato growers, dough, mushroom farmers plus the value created by Dominos themselves as they put the pizza together and get it to the consumer.
Measurement of National Income using Income Method. National income can be defined by taking three viewpoints, namely production viewpoint, income viewpoint, and expenditure viewpoint. These are government expenditures but they are not included in national income because they are paid without adding anything to the production process during the current year. Gross domestic product shows the output produced in a country regardless of their owner. In calculating national income according to this method, we shall have to take into account the total amount of rent, wages, interest and profit. The fourth category includes corporate profit earned by the business corporations and the fifty categories contain net interest earned by individuals from sources other than the organs of the government. Or else, it should not be reckoned at all.
Similarly, horse-racing is a legal activity in England and is included in national income. This method is not as popular as the previous ones. It represents intermediate transactions from the farmer F to the flour mill M , to the baker B , to the trader or merchant T — all taking place within the boundaries of the firms. Capital Gains: The problem also arises with regard to capital gains. Now, I buy your second-hand bike from an auto dealer, who gets Rs.
Thus the national income is the sum total of value added by different producing units of an economy in the production process. The double counting can be avoided by two measures. It is usual to denote national income with reference to prices of a particular year. If each time, this wheat or its flour is taken into consideration, it will work out to Rs. But it is difficult to distinguish properly between a final product and an intermediate product. The Income Method The income method is based on the statistics of income tax. These are not included in the estimation of national income.
But, in actuality, there is no difference in the fundamental forms of such commodities, no matter they can be exchanged for money. Some fixed equipment wears out, its other components are damaged or destroyed, and still others are rendered obsolete through technological changes. In the above example, the final product is bread sold to the consumers for Rs. Value Added Method : This is also called output method or production method. Income equal to the value of production used for self-consumption should be estimated and included in the measure of national income. In national income accounting, interest is restricted to the payment by production units. Theoretically all three of them should give same final number, but in reality there will be slight difference between each of them.
In the above example, bread was a final product and its purchase by the consumer is a final transaction and hence a part of the final expenditure. It is just a help by the government without anything in return. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are not included in national income. Real term values help to compare the value of national output over time eliminating the monetary effects of inflation. The consumption and saving method Under the method, it is possible to find out the total income of country if we know the value of consumption and saving in a year. The profits are distributed by the production unit under three heads. Value added refers to the addition to the value of raw materials and other inputs during the process of production.
Most of all the data is not meant for national income accounting, it is a by-product of other institutions and can thus be inadequate in several cases. Some products have a low value-added, for example those really cheap tee-shirts that you might find in a supermarket for little more than £5. For example, a peasant sells wheat worth Rs. In practice, while estimating national income, any of these three definitions may be adopted, because the same national income would be derived, if different items were correctly included in the estimate. Output method or production method, industry of origin method measures the value added of each industry. L Domestic Income : Income generated or earned by factors of production within the country from its own resources is called domestic income or domestic product. Third, it is again not possible to have a correct estimation of national income because many of the commodities produced are not marketed and the producer either keeps the produce for self-consumption or exchanges it for other commodities.
But actually the calculations often have to be income or expenditure bases and we have very limited information on some sectors as no-one collects the data. On the other hand, intermediate consumption refers to the value of non-durable goods and services purchased by a production unit from another production unit in particular period of time. If, instead he keeps some produce for his self-consumption, it has money value which must be included in national income. 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. In particular, the increase or decrease in inventory is added to or subtracted from it.