Licchavi Lyceum


Licchavi Lyceum

Describe different methods of measuring National Income and explain by which method National Income is measured in India.

National Income, also known as Gross National Income (GNI), is a key economic indicator that measures the total economic output produced by a country over a specified period, usually one year. Various methods can be used to measure national income, and the choice of method depends on data availability, the nature of the economy, and the purpose of measurement. The primary methods for measuring national income are:

  1. Production or Value-Added Method:
    • This method calculates national income by summing up the value-added at each stage of production. Value-added is the difference between the value of output (goods and services) and the value of intermediate consumption (inputs used in production).
    • It is calculated using the following formula: National Income = Gross Value of Output – Value of Intermediate Consumption
  2. Income Method:
    • The income method calculates national income by adding up all the incomes earned in an economy. This includes wages and salaries, rent, interest, and profits.
    • The formula for calculating national income using the income method is: National Income = Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Taxes on Production and Imports – Subsidies
  3. Expenditure Method:
    • The expenditure method calculates national income by summing up all the expenditures made in an economy. It is based on the principle that every expenditure by one economic entity is income to another.
    • The formula for calculating national income using the expenditure method is: National Income = Consumption Expenditure + Investment Expenditure + Government Spending + Net Exports (Exports – Imports)
  4. Product or Output Method:
    • The product or output method measures national income by summing the output of all goods and services produced in the economy during a specific period.
    • It is suitable for economies with well-developed production data and is often used in the early stages of calculating national income before more detailed data becomes available.

In India, the primary method used for measuring national income is the Income Method. The Central Statistical Office (CSO) of India collects data on various income components, including wages and salaries, rent, interest, and profits, from different sectors of the economy. These components are then aggregated to calculate the country’s Gross National Income (GNI) or Gross Domestic Product (GDP).

It’s important to note that India also uses the Expenditure Method to estimate GDP, especially when data on income components are not readily available. The CSO compiles data on consumption expenditure, investment expenditure, government spending, and net exports to calculate GDP using this method.

In summary, India primarily measures its national income using the Income Method, with the Expenditure Method serving as an alternative approach in specific situations. These methods help policymakers and economists analyze the country’s economic performance, plan for development, and make informed decisions.