Method of Measuring National Income


Accordingly, we have three methods of measuring national income:

(i)                 Product Method or Value Added Method,
(ii)               Income Method and
(iii)             Expenditure Method.

Following is a brief description these methods.

1.       Product Method or Value Added Method

 Product Method or Value Added Method is that method, which measures the national income by estimating the contribution of each producing enterprise to production in the domestic territory of the country in an accounting year.

The Concept of Value Addition

Value added is the difference between value of output of an enterprise and the value of its intermediate consumption.

Value Addition or Value Added = Value of Output-Intermediate Consumption

What is Value of Output?

It refers to market value of the goods (or services) produced by a firm during an accounting year.
If the entire output of the year is sold during the year, value of output = sales.

Value of Output = Sales, if entire output of the year is sold during the year.

If some output remains unsold, it is added to the firm's inventory stock. It is expressed as change in stock  during the year.

In such a situation, value of output is measured as the sum total of 'sales during the year and change in stock during the year'.

Value of Output =Sales + Change in Stock, if some output remains unsold during the year


What is Intermediate Consumption?

It refers to value of non-factor inputs (all inputs other than factor inputs of land, labour, capital and entrepreneurship). Primarily, it includes value of raw material used in the process of production.

What is Change in Stock ?

It is measured as the difference between closing stock' of the accounting year and opening stock of the accounting year'.

Change in Stock = Closing Stock - Opening Stock 

Measurement Of National Income


Precautions regarding Product Method or Value Added Method

Following are some of the important precautions regarding product method or value added method:

(1) Value of the sale and purchase of second hand goods is not included in value added. Because, value of second hand goods is already accounted for during the year they were produced.

(2) Commission earned on account of the sale and purchase of second hand goods is included in the estimation of value added. Because, commission is a reward for the services rendered.

(3) Own account production of goods of the producing units is taken into account while estimating value added. Because, these goods are like those produced for the market.

(4) Value of intermediate goods is not included in the estimation of value added. Because Value of intermediate goods is already reflected in the value of final goods.

Problem of Double Counting

Estimating national income with output method might lead to the problem of double counting. The problem of double counting is the problem of estimating the value of goods and services more than once. This is because while estimating national income by using final output method, the value of only final  goods and services is taken into consideration.

How to Avoid Double Counting?

To avoid double counting two methods are used:

(1) Final Output Method, and
(2) Value Added Method.

(1) Final Output Method: According to this method, the value of intermediate goods is deducted from the value of output In other words, the value of final goods and services only is included in national income.

(2) Value Added Method: Value Added refers to the difference between value of output and the value of intermediate consumption of each producing unit in the country. Sum total of value added by all the producing units within the domestic territory of the country is equal to Domestic Product.