National Income — Economics STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceEconomicsNational Income5 Marks
Question
Explain the production (output) method for measuring national income.
✓
Answer
Introduction :
National income is a coin with three sides.
There are three methods to calculate national income
Production method.
Income method.
Expenditure method.
National income can be measured by three different methods on the basis of three different concepts.
Production (output) method for measuring National Income :
To calculate national income, this method is the most popular method.
This method of measuring national income has been developed from the definition given by Prof. Marshall.
During the year, the annual value of finished.
goods or services in agriculture, industries and services sector and its multiply with market price we get the monetary value.
The sum of monetary value of goods and services is the national income.
There are two ways of finding out the monetary value of goods or services :
To take final value of goods or services into account and not to consider the raw material or half finished goods.
To calculate the addition of value at each stage of production and come to the final calculation and by totaling it we get monetary value.
Method (Important Factors) :
Following matters are taken into account while measuring national income according to this method.
Classification of economy in different sectors :
First of all, economy is classified into various sector like agriculture, industries, services, mines, construction, manufacturing, trade- commerce, transportation, communication, banking, education etc.
Selection of goods or services:
In various parts of economy, only finished goods are considered intermediate goods or services are not being measured.
Service of house-wife :
The service of household work of a house wife is not sold in market and its monetary value cannot be measured.
So, it is not considered as national income.
Self-consumption :
Goods produced for self-consumption are not sold in market so its monetary value cannot be measured.
It is not considered as national income. E.g. food grain for self use for own house.
As an expectation the food-grain for self-consumption of farmers in India is considered as national income.
Defense (Police) :
There are no markets for the services of defense and police.
However, they are considered in calculation of national income.
Imputed Rent :
When a house is given on rent, the probable rent obtained is called imputed rent and its value is considered in national income.
Double counting :
Double counting should be avoided while measuring the national income.
When the value of one commodity is calculated for calculating nation alone time in national income it brings artificial value of the national income.
While calculating national product in terms of production the double counting should be avoided.
In national income, the monetary values of both iron and the machines made out of iron during a year are counted then it is called double counting.
Here the value of iron is included in the value of machines.
Thus if we calculate the value of iron and the machines then value of iron being calculated for two times.
There are two methods to avoid double counting.
One is that to count the value of finished goods only and second is that the use only value added method.
Indirect Tax and subsidy :
Due to inclusion of indirect taxes in the market value of goods, the indirect taxes are deducted and subsidy given by government is added to find out national product.
Resale :
When the goods were produced in the past year then its value was counted in the national product.
But if it is resold then value is not counted, but if it is counted then it will be the double counting.
If a house purchased in year 2008 and it is resold today then this resell value is not considered in national products.
To Deduct Depreciation :
During the process of production value the depreciation related to capital factor must be deducted from the national product.
Export and Import value :
In the calculation of national income, export value is added and import value is deducted.
The value of smuggled or illegal goods is not considered in the calculation of national income.
Foreign income should be added.
In short, national income can be found out by following formula.
$Y = (P - D) + (S - T) + (X - M) + (R - P)$
Here,
$Y =$ National income,
$P =$ Production within the country,
$D =$ Depreciation of capital.
$S =$ Subsidies,
$T =$ Indirect taxes,
$X -$ The value of export,
$M =$ The value of import,
$R =$ Receipts from foreign countries,
$P =$ Payment to foreign countries.
Evaluation:
The benefits of this method is that along with national income, the relative share of growth in different fields can be obtained.
In a country where innumerable commodities are produced it is difficult to obtain the exact total of production.
Here, how changes in quality of goods have to be considered remains a problem.
It is difficult to know the exact depreciation cost of capital equipments.
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