Methods for Measurement of National Income!

(a) Three Phases in Circular Flow of National Income:

There are three different phases in circular flow of national income, viz. production, income and expenditure. They represent three related aspects, namely, production (i.e., generation of income), distribution (of income) and disposition (of income, i.e., expenditure).

How? Production of goods and services is the result of combined efforts of factors of production (land, labour, capital and enterprise).

The net output emerging from production process gets distributed in the form of money income (rent, wages, interest and profit) among factors of production for rendering productive service in the production of output.


Thus, production generates income or production low gives rise to income flow. With this income factors of production purchase goods and services for final consumption and investment .In this way income creates expenditure or income flow gives rise to expenditure flow.

In this way, income is generated, distributed and spent. Mind, circular flow of production, income and expenditure does not end here because expenditure, in turn gives rise to further production. In short, production generates income, income creates expenditure and expenditure, in turn, calls forth production.

Thus, incomes which originate in production units ultimately come back to them by way of expenditure on goods and services by factor owners. This makes the circular flow of production, income and expenditure complete as shown in Fig. 6.6.

We can look at national income as a flow of goods and services, as a flow of income or as a flow of expenditure.



Data required in different phases:

For measurement of national income, we can approach from three different angles, viz. as a flow of production, as a flow of income and as a flow of expenditure. To measure it at each phase, different Circular flow of production, data and methods are required,

(i) To measure at the phase of expenditure production, data regarding net value added at FC by all production producing units are required.


(ii) At the phase of income, data regarding/actor income (rent, wages, interest and profit) generated in production of goods and services are required.

(iii) At expenditure (disposition) phase, data of final expenditure (on consumption and investment) by all the three spending units—producing enterprises, general government and consumer households—in the economy are needed.

National income data collected through:

(i) Production Method reflects relative significance of different industrial sectors of economy.

(ii) Income method indicates distribution of income among factors of production which help to produce.

(iii) Expenditure method reflects the standard of living of the people and the pattern of investment.

(b) Methods of Measurement:

In fact methods of measurement of national income originate from three different phases in circular flow of national income.

Corresponding to the above-mentioned three phases, there are three methods of measuring national income as shown below:

(i) Value Added Method (Traditionally called Production Method)


(ii) Income Method

(iii) Expenditure Method

Methods of Measuring National Income

Since the above three methods are only different viewpoints of the same flow of goods and services, totals from each method should, therefore, be equal to each other. We now take up each method one by one and try to understand the procedure involved in each method. In every method we first estimate Domestic Income and then derive National Income by adding NFIA to domestic income.