Top 5 Methods for Estimating the National Income

Here we detail about the top five methods for estimating the national income.

1. The Product Method:

Also known as ‘Inventory method’ or ‘Commodity Service Method’. It consists in finding out the market value of all goods and services produced in a country during a given period.

We sum up the value of the gross product of all producers in an industry and from this total are deducted the value of the intermediate products consumed and depreciation of equipment during the process of production.

A net figure of this kind is found for each industry. The total of estimates would give us net domestic product at factor cost classified by industrial origin. The addition of net income from abroad to this total would give us net national income at factor cost.

2. The Income Method:

This method consists in adding together all the income that accrue to the factors of production by way of wages, rents, interests and profits. This gives us national income classified by distributive shares. The factor owners are paid for the productive services rendered by them in money. The total money payments made to the factors of production in the economy represent the total money value at factor cost. What is factor payment (cost) for the producers is factor income (earning) for the factor owners. Thus, under income approach GNP is found by adding up the total factor incomes generated in producing the national product.

3. The Expenditure Method:

Under this method we add up personal consumption expenditures, the gross private domestic investment, the Government purchase of goods and services and the net foreign investment to obtain GNP at market prices. We deduct depreciation to obtain NNP at market price, less Indirect Taxes give us net national income at factor cost. In this method of national product measurement, the GNP is regarded as a flow of total goods and services bought through the money payments by the community.

However, money value of the GNP obtained through expenditure method might differ from the value of GNP obtained through the product method, because the total purchases, by the community during any given time period may be either more or less than the total production of the period.

In case there are excess purchases during the given period, inventory stock will decline; otherwise, inventory stock at the end of the period will be higher to the extent the purchases during the period, fall short of their total production during the given period. However, after necessary adjustment in inventory changes the measurement of GNP by both the methods should be identical.

Further, if the goods do not enter the market or sale or are consumed directly or bartered away, as in developing economies, the estimates of GNP by adding up total expenditures may be less than actual GNP by product method. Under these circumstances, excluded market transactions will have to be imputed, which is rather a difficult conceptual problem.

The three methods of measuring national income give us the same figure of national income provided our counting is consistent. This equality of national income, output and expenditure arises because there are three flows: output, income and expenditure in the economy which are interrelated. When output takes place, income accrues to the factors of production, which manifests itself in total expenditure. Thus, aggregate output, income and expenditure must equal.

4. Social Accounting Method:

This is another method of measuring national income developed by Richard Stone in recent times. According to the social accounting method various types of transactions are classified in different groups. These are producers, traders, final consumers, etc. Estimates of national income are prepared after taking into consideration the figures of transactions of certain representative persons with similar economic position belonging to different groups.

5. Combined Method:

It is not possible to estimate correctly the national income by adopting a particular method. Each method has its own weaknesses. In order to overcome these practical difficulties we make use of two or three methods to find out true national income—it is called mixed or combined method. Mixed or combined method is used in under-developed countries to estimate the national income because the dependence on one or a particular method does not give correct results for want of accurate figure. This mixed method was followed in India in 1948-49 by National Income committee because production or income method alone could not give correct results.