Methods of measuring NI

8/7/2019 Methods of measuring NI

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Introductiony The national income accounts are an accounting framework used in

measuring current economic activity.

y To measure how much output, spending and income has beengenerated in a given time period we use national income accounts.These accounts measure three things:

y 1.Output: i.e. the total value of the output of goods and services

produced in the economyy 2. Spending: i.e. the total amount of expenditure taking place in the

economy.y 3. Incomes: i.e. the total income generated through production of

goods and servicesy There are three ways of calculating GDP - all of which should sum to

the same amount since the following identity must hold true:

NationalOutput =National Expenditure (Aggregate Demand) =National Income


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Methods Used:y To measure the national income of a country, we use

three different methods:

(1) The product method /value added method(2) The income method

(3) The expenditure method

y In theory, the 3 methods should give the same value of

national income but due to errors and difficulties indata collection, there tends to be discrepancies in thevalues and we have to make adjustments for suchdifferences when we calculate and present the data


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Output or Value-Added Approach

y This method approaches national income from the output side.

y It measures economic activity by adding the market values of goodsand services produced, excluding any goods and services used up inintermediate stages of production.

y Under this method, the economy is divided into different sectors suchas agriculture, fishing, mining, construction, manufacturing, trade andcommerce, transport, communication and other services. Then, thegross product is found out by adding up the net values of all theproduction that has taken place in these sectors during a given year.

y

In order to arrive at the net value of production of a given industry,intermediate goods purchase by the producers of this industry arededucted from the gross value of production of that industry. Theaggregate or net values of production of all the industry and sectors ofthe economy plus the net factor income from abroad will give us theGNP.


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Output or Value-Added Approachy If we deduct depreciation from the GNP we get NNP at market

price.

y

NNP at market price indirect taxes + subsidies will give us NNPat factor cost or National Income.

y The output method can be used where there exists a census ofproduction for the year. The advantage of this method is that itreveals the contributions and relative importance and of the

different sectors of the economy.

y This method is to avoid the so-called double-counting or anover-estimation of GNP. However, there are difficulties in thecollection and calculation of data obtained.


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AppleInc and Juicyapp

y Imagine an economy with only twobusinesses-AppleInc and Juicyapp.

yAppleinc owns and operates apple garden.

y It sells some of the its Apple directly to the

public and rest of its to Juicyapp, whichproduces and sells Apple juice.


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AppleInc and Juicyappy

Apple IncRs 25000

HouseholdsRs 10000

JuicyappRs 15000

Wages

Rs10000

Profit after tax

Rs 10000

TaxRs 5000

Profit

before taxRs 15000


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AppleincApple purchased

Rs 15000

Juicy appRs 30000

WagesRs

5000

TaxRs 2000

Profitbefore

taxRs 10000

Juice sold to

householdRs 30000

Profit aftertax

Rs 8000


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AppleInc and JuicyappyJuicyapp processed Apple worth Rs 15000 into a

product worth Rs 30000.

yJuicyapp s value added is Rs 15000 (Rs 30000-Rs15000).

yAppleinc doesnt use any inputs purchased from otherbusinesses ,so its value added is revenue Rs 25000.

y Total value added in the economy is Rs 25000 + Rs15000 = Rs 40000.


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Precautions:y The following precautions should be taken while

measuring national income of country through valueadded method:

- Imputed rent values of self occupied houses should beincluded in the value of output.-Sale and purchase of second hand goods should not beincluded in measuring value of output of a year

-Value of production for self consumption are to be

counted while measuring NI.-Value of services of housewives are not included.-Value of intermediate goods must not be counted whilemeasuring value added because this will amount to doublecounting.

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Methods of measuring NI