Measurement of National Income: Objectives, Methods, Advantages & More

Measurement of National Income is the process of finding the total output of a country's economy. It involves the aggregation of the value of all goods and services produced within a nation over a specific period, usually a year, expressed in monetary terms. The accurate measurement is essential for the assessment of economic health, planning, and policy-making.

Measurement of National Income is one of the most important topics for the UPSC IAS exam. It covers a significant part of the Economy subject in the General Studies Paper-3 syllabus and current events of national importance in the UPSC prelims syllabus.

In this article, let us look at the concept of national income, its salient features, measurement methods, objectives, advantages, challenges and important facts of national income for the UPSC IAS Exam.

Check the linked article on Gini Coefficient.

Measurement of National Income

The value of the commodities and services a nation produces in a fiscal year is referred to as national income. As a result, it represents the sum of all economic activity carried out in a nation over the course of a year and is measured in monetary terms. The terms national dividend, national production, and national expenditure are sometimes used interchangeably with the ambiguous concept of national income.

The equation to calculate national income is as follows:

Where,

• C stands for consumption.
• I stand for total investment expenditure
• G stands for the expense made by the government
• X stands for exports and
• M stands for imports.

The positions of X and M are interchangeable depending on whether the trades are trade surplus or deficit.

Objectives of Measuring National Income

The national income of a country is measured with the following objectives:

• To compute the economic advancement of a country.
• To compare the economic growth of several countries.
• To measure the contribution of different sectors to the country’s economic growth.
• To analyze the issues experienced by the economy.
• To assist the government in planning and implementing various projects.
• To determine the limitations and benefits of various economic activities like production, consumption and distribution.

Check the linked article on What is Unified Payment Interface.

Methods of Measuring National Income

There are three methods of measurement of the national income of a country.

• Income Method
• Product or Value Added Method
• Expenditure Method

Income Method of Measuring National Income

The income method of national income calculation is used at the distribution level. The national income is estimated using this method as a flow of factor incomes.

• Labor, capital, land and entrepreneurship are the four important production components.
• Labor is compensated with wages and salaries. Capital is compensated with interest. The land is compensated with rent, and entrepreneurship is compensated with profit.
• Moreover, certain self-employed individuals, such as doctors, lawyers and accountants, use their labor and capital. The earnings of such people are classified as mixed-income.
• The Net Domestic Product (NDP) at factor costs is the sum of these factor incomes.

National Income using the Income method is calculated as follows:

Where,

• w stands for wage and salaries.
• R stands for income from rental sources.
• P stands for profit.
• I stand for mixed income.

Check out the Economic Survey 2022 here.

Product/ Value Added Method of Measuring National Income 

In this case, the national income is estimated at the production level. The national income is estimated using this method as a flow of goods and services.

• We determine the fiscal value of all final goods and services produced in a country’s economy annually. “final goods” refers to commodities consumed immediately rather than being engaged in a subsequent manufacturing process.
• Intermediate goods are those goods that are made use of in the manufacturing process.
• Since the value of intermediate products is already included in the value of final goods, we do not have to consider the value of intermediate goods in national income; if taken into account, the value of the goods would be counted twice.
• To avoid duplication in counting, we can use the value-added approach, which computes the value-addition (i.e., the value of the final product plus the value of the intermediate product) at every production stage and then adds them together to get the Gross Domestic Product.
• The total is the GDP at market prices, considering that the monetary value is measured at market prices.

National Income using the Product/ Value Added method can be calculated as follows:

Check the linked article on New Economic Policy 1991.

Expenditure Method of Measuring National Income

The expenditure method can determine national income during the disposition phase. The national income is calculated using the expenditure method as a flow of expenditure.

• The gross domestic product (GDP) is the sum of all the private consumption expenditures.
• The factors such as government consumption expenditure, gross capital formation (public and private) and net exports must be considered here.

National Income using the Expenditure technique can be calculated as follows:

Check the linked article on Economic Planning in India.

Advantages of Measuring National Income

Understanding national income is important as it provides an overview of the economic performance and well-being of a country.

• Measuring national income provides a comprehensive snapshot of a country's economic health.
• It helps in assessing the population's overall standard of living and well-being.
• National income data aids in formulating effective economic policies and development plans.
• It assists in comparing the economic performance of different regions and periods.
• The data is crucial for monitoring economic growth, stability, and progress.
• It offers insights into income distribution and inequality within the country.
• Investors and businesses use this information to make informed decisions.
• International comparisons of national income help in assessing India's global economic position.
• It serves as a valuable tool for fiscal and monetary policy formulation.
• Accurate national income measurements are essential for international trade and investment decisions.

Check the linked article on the Fiscal Responsibility and budget management act!

Difficulties in the Measurement of National Income

The estimation of the National Income poses the following types of difficulties.

Conceptual Difficulties

• It is challenging to compute the value of some items, such as services rendered for free and commodities to be sold but utilized for self-consumption.
• At times, it becomes difficult to distinguish between primary, intermediate and final goods.
• What price should be chosen to decide on the fiscal value of a National Product is always a difficult question.
• Whether to incorporate the earnings of foreign companies in the National Income is always a question since they send out a major portion of their income outside India.

Statistical Difficulties

• In case of changes in the level of prices, we need to use the index numbers that have their inherent limitations.
• Statistical findings are only sometimes precise as they are based on sample surveys. Also, all the necessary information is only sometimes available.
• Different countries adopt different methods of estimating National Income. Thus, it is not readily comparable.

Check the linked article on the National Sample Survey Office (NSSO).

We hope your doubts regarding the topic have been addressed after going through the above article. Testbook offers good quality preparation material for different competitive examinations. Succeed in your UPSC IAS exam preparations by downloading the Testbook App here!

We hope all your doubts regarding the Measurement of National Income would have been addressed now. Testbook provides study notes for different competitive examinations. Master your preparations for the UPSC exams by downloading the Testbook App!