Question

Answer the following questions:

1) What is double counting of national income?
2) What are the features of national income?
3) Explain the concept of Gross domestic product at market prices.
4) State the precautions while using expenditure method to measure national income.
5) Explain the income method of measuring national income.

Answer 1

1) One of the major problems involved in the estimation of national income by the value added method is the problem of double counting. Double counting refers to a situation where the value of a good is taken into account (counted) more than once. This is particularly so for intermediate goods. Such a problem occurs because, for every producer, the commodity he sells is the final commodity. Thus, if the value of the intermediate good is taken into account every single time, it leads to its estimation more than once, one when it was produced and second as a part of final good. This leads to overestimation of the value of final good.

2) National income is the sum of the values of all the final goods and services produced during an accounting period by the normal residents of a country. It can be calculated by three different methods, namely:
a) Output method
b) Income method
c) Expenditure method

Some of the important features of national income are as follows: -
i. Macroeconomic concept: Macroeconomics studies how an economy operates as a whole and focuses on the aggregate measures. Since national income is an aggregate term, it can be regarded as a macroeconomic concept.
ii. Flow concept: National income is measured over (during) a period of time. In other words, it can be said that the national income has an element of time attached to it. Thus, it is a flow concept.
iii. Money valuation of goods: Since national income is the total market value of all the final goods and services in terms of money produced within the domestic territory during an accounting year, it can be concluded that national income is the money valuation of goods.
iv. Includes the value of final goods and services: National income includes only the value of final goods. The value of intermediate goods is not included in the estimation of national income. This is to avoid the problem of double counting.
v. Net aggregate value: National income is the net aggregate value. In the sense, it includes goods and services produced by the firms during an accounting year. It does not include depreciation or consumption of the fixed capital.
vi. Inclusion of Net factor Income from Abroad (NFIA): National income includes the net factor income from abroad. That is, it includes the net export value and net receipts.

3) Gross Domestic Product at Market Prices (GDP_MP) refers to the market value of all the final goods and services produced within the domestic country during an accounting year inclusive of depreciation. It is a gross concept as depreciation is not taken into account in its estimation. Also, GDP is limited to the domestic territory and excludes the Net Factor Income from Abroad (NFIA).

4) Precautions regarding calculation of national income by the expenditure method are:
i. National income estimation should include only the final goods and services. Intermediate consumption expenditure should not be included.

ii. Expenditure on the purchase of second hand goods should not be included in the national income estimation of the current accounting year. This is because it has already been included in the national income of the accounting year in which these goods were originally purchased.

iii. Expenditure on shares and bonds is not included. This is because these shares and bonds are mere financial assets and do not reflect any production activity of the goods or services.

iv. Imputed value of the goods and services produced for self consumption are included.

v. Expenditure on transfer payments by the government should not be included. This is because such payments are not related to any production activity in an economy.

vi. The value of subsidies should be included.

5) According to the income method, national income is estimated by aggregating all the factor incomes (in the form of wages, rent, interest and profits) paid to the owners of these factors of production (land, labour, capital and enterprise) within the domestic territory in an accounting year.
That is,
NNP_FC or National Income (NI) = Compensation of employees (COE) + Operating surplus + Mixed income +Net Factor Income from Abroad (NFIA)
Where:
Compensation of Employees (COE) includes
a. Wages and salaries paid in cash.
b. Compensation paid in kind
c. Employer's contribution to the social security schemes such as pension fund, provident fund etc.
Operating surplus includes rent, interest, royalty and profit.