What is National Income? | Methods of Calculating National Income

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Income is money that a person or a business receives in return for working, providing a product or goods or services or investing capital. Hi friends, in today’s article we are going to know about national income. So let’s discuss in details.

What is National Income?

Definition of National Income – National income is the sum of total factor income including net factor income from abroad earned by the normal residents of a country during one year.

In other words, national income refers to the money value of all final goods and services produced in an economy during a year.

Methods of Calculating National Income

Generally there are three methods of calculating the national income – (i) The product method (ii) The expenditure method and (iii) The income method.

• The Product Method – According to this method the total value of goods and services produced in a country during a year is calculated at market price. Under this method there are two approaches –

(a) Final product method or approach – In this approach total value of final goods and services produced in a year is calculated, at market prices following are the important step in this method –

• GDPmp = Price x Quantity

• GNPmp = GDPmp + NFIA (NFIA full form – Net Factor Income from Abroad)

• NNPmp = GNPmp – Depreciation

• NNPFC or National income = NNPmp – Net indirect tax

(b) Value added method – In this method the value added or created at difference stage of production is counted for estimating national income.

Value added = Value of total output – Cost of intermediate goods.

National income of a country can be calculated by using value added method in the following ways –

(i) All production units in country are divided into three sector – Primary sector, secondary sector and service sector.

(ii) The value added of this sector is calculated by using following formula –

Value added = Value of total output – Cost of intermediate goods.

• The Expenditure Method – Factor income earned by factors of production is spent on purchase of goods and services produced by the firm. The main step of calculating national income by expenditure methods are as follows –

(i) The expenditure units of an economy are classified into four sector – Household sector, producing sector, good sector and external sector.

(ii) The final expenditure are classified into four heads –

(a) Private final consumption expenditure.

(b) Gross domestic capital formation.

(c) Government expenditure.

(d) Net import.

∴ GDPmp = a + b + c + d

(iii) NDPFC = GDPmp –  depreciation – Net indirect tax.


Difficulties in the Measurement of National Income

The important problems of national income accounting or the difficulties in measuring national income are discuss below –

• Problem of Double Counting – Double counting means a situation where value of one commodity is being included in the national income more than once. It creates a major problems to estimating the national income.

• Transfer Income – Transfer income are those income which earned without paying any productive activities, like donation, pension. In national’s income such income are not included.

• Black Money – Black money is one kind of illegal money which is not include in the national income accounting.

• Problem of choice of Formula – There are three method of calculating national income. But in reality it is very difficult to choice an appropriate formula. The choice of formula depends upon availability of data.

• The concept of Nation – The national income included net factor income from abroad but in reality national’s income hence it creates conceptual problem.

Components of National Income

The major components of national income are discussed below –

• Consumption Accounting – The consumption components of GDP (Gross Domestic Product) consists of the household sectors purchase of currently produced goods and services. There are three categories of consumption expenditure –

(i) Consumer’s durables which are long lasting consumer items such as cars, television, furniture, etc.

(ii) Perishable consumer goods, which are shorten lived items such as good, clothing, fuel, etc.

(iii) Consumer services such as education, heath care, financial services, etc. This in the largest component of GDP.

• Investment – The term investment in the national income accounts has a price meaning which is not always the same in its everyday use. The purchase of share or a bond by an individual is an investment from an individuals point of view.

There are three types of investment in the GDP (GDP meaning – Gross Domestic Product) accounts –

(i) Business fixed investment.

(ii) Residential construction.

(iii) Inventory investment.

• Government purchase of goods and services – The next component of GDP is government purchases of goods and services. Government purchase are spending by central, state and local govt. on goods and services such as teachers salary highways and aircraft carriers.

Govt. transfer payments to individuals like pension, social security benefit relief payments, etc. are expands of expenditure that are not included in GDP.

• Net Exports – The final components of GDP is net exports of goods and services. Net export is equal to total exports minus imports. Gross exports are currently produced goods and services sold to foreign countries. They are the part of GDP.

• Production Account – The production account related to the business sector of an economy. It includes all types of productive activities such as manufacturing trading etc. It covers public and private company firm, state owned undertaking business.


So friends, this was the concept of National income’s. Hope you get the full details about it and hope you like this article.

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