The estimation of national income of a country depends upon the availability of statistics. Several methods have been suggested for the calculation of national income of a country.
1. The Product Method:
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It is also known as ‘Commodity Service Method’. This method suggests in finding out the market value of all goods and services produced in a country during a given period.
Here we add up the value of the gross product of an industry and from this total, we deduct the value of the intermediate products and depreciation of equipment during the process of production.
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A net figure after all such deductions is found for each industry. Then, a total estimate of all industries would give us net domestic product at factor cost. This new product at factor cost is classified by industrial origin. Then net factor income from abroad is to be added to this total net domestic product. This will give net national income at factor cost.
2. The Income Method:
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Factors of Production are engaged to produce goods and services. So, factors of production receive income by way of wages, rents, interests and profits. This gives us national income classified by distributive shares. The factors of production are paid for their productive services. They are paid in terms of money.
The factor payment is the cost for the producers. So, what is factor payment for the producers is the factor income for the factor owners. Here Gross National Product can be calculated by adding up the total factor incomes generated in producing the national product.
3. The Expenditure Method:
Here we add up private consumption expenditure, the gross private domestic investment, government purchases (or govt. expenditure) and net foreign investment. This gives rise to Gross National Product at market prices. Then we can deduct depreciation from GNP and we can get NNP at market prices.
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From this we can calculate net national income at factor cost.
So, NNPFC = NNPMP – Indirect taxes + Subsidies
= > NNPFC = NNPMP – (Indirect taxes – Subsidies) (Indirect taxes – Subsidies)is also known as net indirect taxes.
So net national income at factor cost is equal to net national income at market price less net indirect taxes. In this method GNP is regarded as a flow of total goods and services purchased by the community through the money payments.
Here GNP is calculated through the community expenditure. GNP calculated through the community expenditure method may differ from GNP calculated through the product method.
From the above analysis we knew that in the economy there are three flows like (i) output, (ii) Income and (iii) expenditure. All these three are interrelated. So, there is an equality of national income, output and expenditure.
When output is produced, the factors of production engaged in the process of production of output get income and with this income they spend (on consumption demand and investment demand). So GNP = GNY = GNE.
4. Social Accounting Method:
This method was suggested by Richard Stone. Under this method, various transactions are classified in different groups. These are producers, traders, final consumers etc. Calculation of national income can be done by adding up the transactions of producers, traders, final consumers etc.
As it involves a lot of exercise, transactions of representative persons with similar economic position belonging to different groups may be taken and added up. Then the figures for each group can be found out after adding up transactions of persons with similar economic position.
5. However, it is not possible to calculate the national income by adopting a single method. Each method has some demerits. So, we can mix all methods (This method is known as combined method or mixed method). This mixed method or combined method was followed in India in 1948-49 by National Income Committee.
Out of five methods suggested above, let us discuss the first three methods in details.