Two common measures of income are GNP (gross national product) and GDP (gross domestic product). GDP measures the total value of output (goods and services) produced by the factors of production located within the country's boundary in a year. The factors production may be owned by any one - citizens or foreigners. GNP is the total value of output (goods and services) produced and income received in a year by domestic residents of a country. It includes profits earned from capital invested abroad. While taking them both together we get,
Economically speaking when the demand for commodity goes up; the production increases. Income leads to expenditure which again leads to production. Thus production, income and expenditure are mutually related; economic activities are related to these 3 stage. Based on this 3 methods are used to calculate national income
National income's measurement is necessary for a country due to various purposes; it helps in projection of future course of economy, estimates economic development and how far have they been achieved, helps government to design suitable development policies, helps firms in forecasting the future demand of their product, tells the contribution of various sectors to national income and facilitates international comparison.
Various problems rise while measuring national income. ...
For e.g. we can not add kilograms of wheat, to meters of cloth, to tones of coal in physical terms. (G.F. Stanlake, 1995). Thus the only common measure is money. Secondly when goods and services have no market price values difficulties are encountered like in public services such as defense, law and order, education and health services. The solution adopted is to measure their values at cost. Then there are problems with the goods and services which people provide for themselves like farmers consume some of their own output or much of repair and improvement work is done by 'do it yourself' basis. Rough estimates are used in these cases in measuring national income. Double counting is yet other problem as the output of one firm are the inputs of other firm; two ways to tackle this is either by adding value of final product or totaling the values added at every stage of production. National output is measured at times in terms of factor cost, using market prices could be misleading this is another problem associated with measurement of national income.
Measuring national income
Three different methods are used based on different views of national income. Firstly the production method in which national income is viewed as the total output from domestically owned resources during the course of year. This is the most direct method where the output figures of all the firms in the country are taken. Exports are included but imported materials and services are excluded (this is automatically done as values added in the country are taken). This will give us GDP and to it add NPIA.
Income method the second approach is viewed in terms of incomes earned by factors of production engaged in producing the national output. As the total product is valued at factor cost,