Economics Ch - 4 Class 12th (Methods of Calculating National Income)

 Ch - 4 (Methods of Calculating National               Income)

1.) Value Added Method :-

Value Added is the Difference Between Value of Output of an Enterprises and the value of its intermediate consumption.

  Value Added = Value of Output - Intermediate consumption

  Value of Output = Sales + Δ Stock

Precautions Regarding Value Added Method :-

1.) Value of the Sale and Purchase of Second hand goods is not included in the Estimation of Value Added or GDP. Because value of the 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 of the services  rendered. 

3) Value of the intermediate goods is not included in the estimation of value added. Because,value of a intermediate goods is reflected in the value of final goods. 

4) Imputed rent of the owner occupied house is to be taken into account. because, all houses have rental value, no matter these are self - occupied or rented out. 

5) Services for self - consumption are not considered while estimating value added. simply because, it is difficult to estimate their market value, like, for example,services of housewives . 

Problem of Double Counting :-

The Product method of estimating National income might lead to the problem of double counting. The problem arises when the value of certain goods is more than once.

How to avoid double counting:

1.) Final Output Method - According to this method only final goods and services are to be considered in the estimation of GDP.Intermediate goods are not to be considered.

2.) Value Added Method - Value added refers to the distinction between Value of Output and Intermediate Consumption of producing unit in the country. 

 

INCOME METHOD :-

Income Method is that method which measures national income as the sum total of national income (compensation of employees , rent , interest and profit) earned by normal residents of a country during an accounting year.

Classification / Types of Factor Incomes 

1.Compensation of Employees.

2.Operating Surplus.

3.Mixed Income.

1.Compensation pf Employees :-

 It includes the following incomes :-

a) Wages and Salaries in cash.

b) Payments in Kind (ex. Rent - Free Accomodation).

c) Employer's contribution to social security.

For ex. Provident fund contribution.

d) Pension on retirements.

2.Operating Surplus :-

It refers to income from property and entrepreneurship. It includes :-

a) Rent.

b) Interest.

c) Profit.

d) Royalty.

                              Profit

                                   |                                                                      

  | Dividend |      | Corporate |         |Undistributed|

 part of profit      |     Tax      |          |       Profit     |

  distributed         part of profit         part of profit                                   

     among              paid to               retained by firms

shareholder.            govt.                  for future use.

3.Mixed Income :-

 It refers to the income of the self employed persons using their own labour , land , capital and entrepreneurship in their household enterprises.

Precautions Regarding Income Method :-

A) Income from illegal activities like theft , gambling , etc . is not included in national income . Income generated in terms of black money is also not included.

B) Brokerage on the sale and purchase of shares and bonds is to be included in national income.

C) Income tax is paid out of compensation of employees . It should not be included in the estimation of national income.

D) Commissions paid on the sale and purchase of second - hand goods are to be included in national income as these are reward for rendering factor services.

E) Imputed rent of owner occupied houses is to be treated along with rent as a component of factor incomes.

EXPENDITURE METHOD :-

It is that method which measures National Income in terms of expenditure on the purchase of goods and services produces is the economy during an accounting year.

Classification of Final Expenditure :-

1.Private Final Consumption Expenditure (C) :- 

It refers to the expenditure on final goods and services by the individual households and non - profit private institutions serving society.

2.Goods Final Consumption Expenditure (G) :-

It refers to the expenditure on final goods and services by govt.

For Ex. Expenditure on purchase of goods for consumption by defense personnel.

3.Investment Expenditure (I) :-

 It refers to the expenditure on the purchase of final goods by producers . These goods are further to be used in process of production. 

It is classified as:-

Fixed Investment - It refers to the expenditure by the producers on the purchase of fixed assets like plant and machinery.

-Business Fixed Investment.

-Fixed Investment by household

>Construction of houses - Public Fixed Investment or Fixed Investment by Govt.

>Inventory Investment - It refers to change stock during the year.

4.New Exports (X-M) :-

 It refers to the difference b/w exports and imports during an accounting year.

Precautions Regarding Expenditure Method :-

1.Only Final Expenditure is to be taken into account to avoid error of double counting.

2.Expenditure on second hand goods is not to be included . Because the values of second hand goods has already ban accounted during the year of their production.

3.Expenditure on transfer payments by the govt. is not be included as these do not cause any value addition in economy.

4.Expenditure on shares and bonds is not to be included in total expenditure.

5.Imputed value of expenditure on goods produced for self consumption should be taken into account.