Thus the definition advanced by Pigou has a limited scope. Third, the Pigovian definition is applicable only to the developed countries where goods and services are exchanged for money in the market. In addition, the value of free services provided by government and non-profit institutions should also be taken into account. The national income is, therefore, underestimated by excluding the services of a housewife. According to this method the monetary value of all the final national output in a year is. National expenditure method includes the consumers expenditure not on houses as they are durable goods and included in fixed capital formation. The product method is the principal method used in underdeveloped economies, whereas income method is generally used in developed economics for the estimation of national income.
This method is the opposite of the value-added method. However, the market value of goods and services is different from the earnings of the factors of production. The following items are included in India in this: agriculture and allied services; mining; manufacturing, construction, electricity, gas and water supply; transport, communication and trade; banking and insurance, real estates and ownership of dwellings and business services; and public administration and defense and other services or government services. The difference between export and import are also included in the national income. These refer to net national income and net national expenditure, which ultimately equal each other. Thus, the value added is Rs.
It comprises expenses on durable goods like watch, bicycle, radio, etc. But prices do not remain stable. Generally, production units borrow for making investment and households borrow for meeting consumption expenditure. Excluding the income arising from sale of financial assets, such as shares and debentures. The services of the owner-occupied house are included in national income as if the owner sells to himself as a tenant its services. He sells this wheat to a baker who uses it for making breads. The transaction between the farmer, miller and baker are intermediate transactions.
Some products have a low value-added, for example those really cheap tee-shirts that you might find in a supermarket for little more than £5. Similarly, gambling, being transfer activity is to be excluded. Value Added Method : This is also called output method or production method. These are low cost, high volume, low priced products. O Disposable Income : Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families.
Income per capita is a way of measuring the standard of living for the inhabitants of a country. They may be final goods for one industry and intermediate for others. The process of calculation of national income by using the above discussed three methods has been illustrated in a summarised way, with hypothetical data of an imaginary economy, in Table 4 A, В and C. What method does India follow and why? Statistical information regarding agriculture and allied occupations, and household enterprises is not available. The data pertaining to income are obtained from different sources, for instance, from income tax department in respect of high income groups and in case of workers from their wage bills. Measurement of National Income using Expenditure Method. If we use the constant prices method we could express both 2002 and 2003 output at the same price level.
To this is added, the estimated interest on that private capital which is invested and not borrowed by the businessman in his personal business. Excluding the intermediate expenditure as it is already a part of final expenditure b. Therefore, they should not be treated as a part of national income of a year. Explain the difference between the three main methods of calculating national income - by income, by expenditure and by output. But to improve upon the credibility of net output estimates, it is essential that it should be combined with the income method and expenditure method for sectors where the latter can be more effectively used. In such a situation, the value of output is measured as the sum total of 'sales during the year' and 'change in stock during the year'. Thus, profit Is the sum total of corporate profit tax, dividend, and retained earnings.
Again, if indirect taxes Rs. But the interest received on governmental loans has to be excluded, because it is a mere transfer of national income. Second is by taking the value of final products only. You can see the site in the web window below, or follow the previous link to open the site in a new web window. The expenditure made by foreigners on goods and services of a country exported to other countries which arc called exports and are denoted by X We deduct from exports X the expenditure by people, enterprises and government of a country on imports M of goods and services from other countries.
In the above example, bread was a final product and its purchase by the consumer is a final transaction and hence a part of the final expenditure. But revenue from these goes to the government treasury and not to the factors of production. To derive estimates at factor costs, an adjustment has to be made for indirect taxes net of subsidies, if any. Mk: can either take the final price of the bread paid by the consumer and break it down into its component parts or take value added at each successive stage of production. What is Change in Stock? First, avoiding double counting, the goods and services which can be measured in money are included in national income. Production units in an economy are classified into primary, secondary, and tertiary sectors.