National Income Accounting
There are three methods of calculating national income- Net product method or value added method, income method and expenditure method.
Net Product or Value Added Method: National income is the money value of all the final goods and services produced by the residents of a country within or outside the domestic territory of a country in an accounting year. It includes Net Factor Income from Abroad. This method, however, has many difficulties. These include the problems of inclusion of inventories, depreciation and the problem of double counting, etc.
The income method measures national income at the phase of factor payments made to factors of production for use of their factor services. National income (income method) = Compensation of employees + operating surplus + mixed income of self-employed + net factor income from abroad. Items such as interest on national debt, sale of second hand goods, bonds, shares, etc. wealth tax, windfall gifts, etc. are not included in this method of national income accounting. However, estimation of mixed income, the method of income calculation, etc. are some of the difficulties of income method of calculating national income.
The expenditure method measures national income at the stage of disposition of final products. National income (expenditure method) = Private final consumption expenditure + government final consumption expenditure + gross fixed capital formation + change in stock + net exports + net factor income from abroad – depreciation – net indirect taxes.
It is essential to calculate the income from all the three aspects.
National income at current prices is the money value of all final goods and services produced in a country during a particular year expressed at market prices prevailing in that year. National income at constant prices measures the final goods and services constituting national income at the market price prevailing in a particular year, which becomes the base year.