National income measures the total value of

goods and services produced within the

economy over a period of time

It is the final outcome of all economic activities of a nation.

In another words, it is the value of the final goods and
service produced in the country in a year.

Production of goods and service generates income and

income give rise to demand for goods and service, demand
give rise to expenditure, and expenditure give further rise
to production of goods and service. Hence, there is a
circular flow of production, income and expenditure.

On the basis of these flows, national income can be

analysed at (1) as a flow of goods and services, or (2) as a
flow of incomes, or (3) as a flow of expenditure on goods
and services.

(a) Final product approach

The final product approach involves estimation of

the market value of final goods and services
produced in the economy in a given period.

Steps in Final Product Approach

(i) The market value of all final goods and service produced
within the country gives the estimate of Gross Domestic
Product at Market Price (GDP at MP), or
GDP at MP=P1Q1+ P2Q2+P3Q3+ .......+ PnQn, Or = PiQi
(ii) The addition of net factor income from abroad in GDP at
MP gives Gross National Product at Market Price
(GNP at MP).
(iii) The deduction of depreciation from Gross National
Product at market price (GNP at MP) MP provides
Net National Product at market Price (NNP at MP).
(iv) The deduction of net indirect taxes from NNP at MP give
Net National Product at Factor Cost (NNP at FC)
(v) Net National Product at factor cost equals National
Income.

Problem of Double Counting

The calculation of national income through final product
approach considers the market value of final goods and
services.
The value of intermediate goods is not included. If the value of
intermediate goods are considered, it will involve the problem
of double counting.
Double counting means, consideration of certain item more
than once which leads to over estimation of national income.
For example, bread is final goods while wheat and flour are
considered as intermediate goods. The price of bread includes
in Nation Income while cost of flour and wheat does not.

(b) Value Added Approach

This approach includes value added at different stages of
production. This method considers national income as sum
total of value added by different production units of a country.
In this method, the cost of intermediate products is deducted
from the total value of the output.

Table: Estimation of Value Added

Producers

Stages
of Value of Cost
of Gross
Value
Production Output
Intermediate Added (Rs.)
(Rs.)
Goods (Rs.)

Farmer

Wheat

400

400

Miller

Flour

700

400

300

Baker

Bread

900

700

200

Total

2000

1000

900

Steps in Value Added Approach

The value added approach measures the contribution of
production units of the country. This methods involves
following steps.
1. All production units of the country are grouped into various
industrial sectors according to their production activities
2. Obtain net value added by deducting depreciation.
3. Adding of net value added of all sector provides Net
Domestic Product at factor Cost (NDP at FC)
4. Addition of net factor income from abroad gives Net
National Product at Factor Cost or National income.

B. Income Method
Income method measures national income from the side of
factor incomes. It is the sum of all income derived from
providing the factors of production.
It includes wages and salaries, rent, interest and profits within a
country in a given year. This is also to note that the net value
added in each production unit is equal to the factor income
generated in that production unit.
The Net Domestic Product at factor cost is equal to the
Domestic Factor Income.

Steps in Income Method

1. Obtain Net Domestic Product at Factor cost (NDP at FC) by
summing up factors payment paid in form of wages & salary,
rent, interest and profit by all production units of all sectors in
the country.
2. Add Net factor income from abroad in Net Domestic Product
at Factor Cost to obtain Net National Product at Factor Cost
(NNP at FC) or national income.
The inclusion of incomes from the various sources to obtain
national incomes should take precaution. The incomes from
those sources which are productive and legal should only be
included to derive national income

Incomes for Inclusion

Value of production for self employment, imputed rent,
corporation tax should be included as factor income

Incomes for Exclusion

Transfer payment, illegal income, windfall gains (like lottery),
gift tax/wealth tax and tax on windfall gain, money received
from selling second hand goods, interest on national debts
(considered as transfer payment) are to be excluded in
estimating factor incomes.

C. Expenditure Method
Expenditure method measures national income as aggregate of
all the final expenditure on gross domestic product in an
economy during a year.
This is the sum of expenditure made for final consumer goods
and investment demand, and for net export.
This method also known as "income disposal method", or
"consumption and investment method" . The total income
generated in the economy is spent either on consumption goods
or on investment goods (capital goods).
Therefore, the sum of total income (Y) equals to the sum of final
expenditure incurred on consumption goods (C) and the sum of
investment goods (I). Symbolically, Y = C + I.

The final consumption expenditure includes

(a) private household consumption expenditure and
(b) government final consumption expenditure.

Similarly, final investment expenditure comprises

(a) gross final investment or gross fixed capital formation,
(b) changes in stock or inventory investment, and net export of
goods and services or net foreign investment (X - M).

Steps in Expenditure Method

1. GDP at MP = Gross National Expenditure at Market Price (GNE
at MP) which is obtained with the sum of Final private
consumption expenditure (C), Government final consumption
expenditure (G), Gross domestic private investment (I) which
includes gross fixed capital formation plus changes in stocks,
and Net export or export minus import (X- M)
Or, GDP at MP = GNE = C + G+ I +(X - M)
2. An addition of net factor income from abroad (NFIA) to
GDP at MP provides Gross National Product at market price
(GNP at MP).
Or, GNP at MP = GDP at MP + NFIA

3.The deduction of net indirect tax (tax - subsidy) from

Gross
National Product at MP provides Gross National
Product at Factor Cost (GNP at FC). Or,
GNP at FC = GNP at MP - Net Indirect Taxes.
4.The deduction of depreciation from Gross National
Product
at Factor Cost provides Net National Product at
Factor Cost
(NNP at FC) or National Income. Or,
NNP at FC = GNP at FC - Depreciation.

Factors to be taken care

1. Expenditure on second hand goods should be excluded It is
because such expenditure on the goods is not considered
to be expenditure on currently produced goods.
2. Expenditure on the purchase of new or old shares and
bonds should be excluded because they are not payments
for goods and services.
3. Government expenditure in the form of transfer payments
should be excluded because these payments do not make
any contribution to the flow of goods and services.
4. Expenditure on intermediate goods and services should be
excluded, otherwise this will lead to the problem of double
counting.

Measuring the level and rate of growth of

national income is important to economists
when they are considering:
Economic growth and where a country is in the
business cycle
Changes to average living standards of the
population
Looking at the distribution of national income (i.e.
measuring income and wealth inequalities)

There are problems of measuring NI, some

of them are as follows:
1. Simon Kuznets difficulties (Definition of the
term Nation, Method to be used, Stage of
economic activity, Types of goods and
services)
2. Problem of double counting
3. Transfer payments
4. Income generated by foreign firms
5. Public services
6. Calculation of depreciation

7.
8.
9.
10.
11.

Inventory revaluation
Capital gains or losses
Changes in value of money
Income from illegal activities
Imputations (non-monetary activities)

In case of developing countries, there are

special problems for measuring NI as
follows:
a) Large non-monetized sector
b) Inadequate and unreliable statistics
c) Illiteracy and ignorance
d) Less occupational specialization
Source: Joshi, S. (2066) Economic Policy Analysis, Taleju Prakashan, Kathmandu