Meaning, Determinant factors and Methods to calculate/compute national income of a country (Economy)

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National income

National income is the total value of all final goods and services which are produced in a country during in 

a financial year. 

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Simply in other words, It is calculation of all final goods and services which are produced in a country generally in a period of 1 year without double count.

Various methods of calculating national income

There are 3 types of measuring national income. They are:

• Output Method
• Expenditure method
• Income Method

Dame Frances Anne Cairncross, DBE, FRSE, FAcSS (born 30 August 1944 in Otley, England) is a British economist, journalist and academic. 

According to Cairncross: national income can be looked in any one of the three ways. As the national income 

can be measured by adding up everybodies output , by adding up everybodies income and by adding 

up the value of all the things that all people buy and adding in their savings. 

Methods to calculate national income

There are 3 methods to calculate the value of national income. A country can perform any of the method based on the availability of the data and purpose. but all the methods will give same or equal result even measured using combination of methods.

Output method (product method) 

Output method is also called as Product method and value added method. The market value of total goods and services is produced in 

an economy in a year is considered for estimating national income. In order to arrive at the 

value of product the total goods and services produced should be multiplied with their market 

prices.

Then national income = P1Q1+P2Q2+ ... + PNQN-deepriciation-indirect taxes + net income from abroad. 

Where  p = price, 

q = quantity. That is 1,2,3,… 

n = Commodities and services. 

There is a possibility of double counting. Care must be taken to avoid this. Only final goods and 

services are taken to compute national income but not raw materials or intermediate goods. 

Estimation of the national income through this method will indicate the contribution of different 

sectors in economic activities and also the growth in each sector and the sectors which are lagging behind. 

Steps involved

• Identifying all the production units in the domestic economy.
• classifying them into primary, secondary and tertiary sectors based on their production activity and similarities.
• Estimating net value of total production by deducting intermediary goods.
• estimating the values of all the production in all the sectors
• estimating income earned from abroad to derive the value of national income. 

Precautions

• Rent of owner occupied houses is included
• Goods produced for self consumption is included
• Value of own production by using fixed assets are included.

Expenditure method

Expenditure method is the perfect and the modern method to estimate the value of national income. It was introduced by J.M Keynes. The main purpose of the method is to track the expenditure of the people and to predict because, Keynes is interested in Knowing the determinants of national income. In this method we add the personal consumption expenditure of 

households, expenditure of forms, government purchase of goods and services, net exports + 

net income from abroad. 

Ni = EH+EF+EG+Net exports + net income from abroad. 

Here Ni = national income, 

national income = private final consumption expenditure + government final 

consumption expenditure + net domestic capital formation + net exports +net income from 

abroad. 

Where E.H = Expenditure of households, 

E F = expenditure of firms, 

EG = Expenditure of Government.

Care should be taken to include spending or expenditure made on final goods and 

services only. 

Mostly Developed economies perform this method to measure National Income.

Steps involved

Income method

In this method the income earned by all factors of production or aggregated to 

arrive at the value of national income of a country. 

The 4 factors of production receive income in the 

form of wages, interest and profit. This is also called as National income at factor cost. 

Land - Rent,

Labour - Wages/salary

Capital - Interest,

Organization - Profit (surplus amount).

N I = w+ I + r + p + net income from abroad. 

Ware n I = national income, 

w = wages, 

I = interest, 

R = rent, 

p = profit. 

This method gives us national income according to distribution of shares. 

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Determinant factors of national income

Introduction

There are number of determinants which are responsible for low and high level of income in a country. If the demand and consumption is high, the income distribution is also high. hence the national income is said to be high. It not only indicates income but also the rate of employment, households, Investment, supply, distribution, etc.

It is true that the total output produced indicates the resources and income of a country.

Natural resources

Natural resources is the main factor to influence the rate of national income. It refers to the resources which are given by the nature such as Minerals, rivers, oceans, mountains, forests, air, water, soil, etc. Rich natural resources helps to produce more and generates more income and vice versa. However, Natural resources should be used in productive way.

Factor cost or cost of production

Factor cost refers to the total amount invested or incurred in the process of production. If the cost of production is low, the demand for that goods is also high. using appropriate technology and utilization of resources determine the factor cost.

Technology

Technology is the machinery and equipment which is used on production process. It reduces the cost of production which leads to decrease in the value of market price. So, all the sections can make expenditure on that products.

Political will and stability’ or political system

political will towards development of nation is a very important factor which can influence the rate of growth of national income.

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