Methods of Estimating National Income

Circular Flow of income

Meaning of Circular Flow
Circular flow of income refers to flow of money income or the flow of goods and services across different sectors
of an economy in a circular flow.
Types of Circular Flow

1. Product Flow: - It is also called output flow or real flow. It refers to flow of factor services and flow of
goods and services. That is, it consists of:
a. Factor flow, i.e., flow of factor services.
b. Product flow, i.e., flow of goods and services.
2. Income Flow: - It is also called money flow. In a monetised economy, the flow of factor services
generates money flows in the form of factor payments which take the form of income flow. The
expenditure on goods and services take the form of expenditure flow. Both income and expenditure
flows move in a circular manner in an opposite direction. Money flows from hand to hand in much the
same way as water flows through a pipe or electricity through a circuit.
Significance of Circular Flow
(a) Knowledge of Interdependence: - Circular flow models help to understand interdependence between
different sectors of the economy. For example, it tells the interdependence between producers and
households.
(b) Size of National Income: - The magnitude of circular flow determines the size of national income. More
the magnitude, more is the national income and vice versa.
(c) Level of Economic Activity: - Circular flow, through its information on various macro variables, tells us
about the level of economic activities in an economy.
(d) Injections and leakages: - Circular flow gives us information on injections like investment, government
spending, exports and leakages like saving, tax and imports.
Phases of Circular Flow
Production phase leads to production of goods and services in an economy. Income or distribution phase leads
to generation of factor income, i.e., rent + wages + interest + profit. Expenditure or disposition phase relates to
spending of income in terms of consumption of goods and services and investment expenditure. This
expenditure leads to further production or flow of goods and services. The three processes go on simultaneously.
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Circular Flow of income in a Two-sector economy

To present the flows of income and expenditure, the economy is divided into two sectors: (a)Household sector,
(b)Firm sector.
Features of household sector are:
(a) They are owners of all factors of production.
(b) The total income received is wages plus rent plus interest plus profit.
(c) They are the consumers of goods and services, i.e., they make consumption expenditure to the business
sector.
Features of firm sector are:
(a) They hire factors of production from the household sector.
(b) They produce and sell goods and services to the households and receive income from them.
(c) They make factor payments to the household sector.
Fig. shows the circular flow in a two-sector economy. The upper half shows the factor market and the lower half
the commodity/product market. Each market generates two flows: a goods (or real) flow and money flow.
Money flow is shown by a dashed or broken line. Each sector is a buyer and a seller.

Thus, in our simple economy,

1. Total production of goods and services by Firms = Total consumption of goods and services by
Household sector.
2. Factor payments by Firms = Factor incomes of Households.
3. Consumption expenditure of Households = Income of Firms sector.
4. Real flow of production and consumption of Firms and Households = Money flow of income and
expenditure of Firms and Households.
Circular Flow of income in a Two-Sector economy with
Financial System
Features of financial system are:
1. All savings by households go to the financial or money market.
2. Financial market invests this money by lending out to firms. Firms need money to finance new
investment in plant and equipment.
In this case, leakages are savings by households and firms. But when firms borrow this money for investment
purposes from financial system then they become injections into the circular flow. Savings are leakages and
investments are injections. Important condition is that leakages must be equal to injections. Savings and
investment are essential for capital formation in a country.

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Circular Flow of income in a Three-Sector economy

The three sectors of an economy are—Household, Firm and Government.
Features of government sector are:
1. Government sector receives direct taxes from the household sector and indirect taxes from the firm
sector.
2. Government sector makes transfer payment to the household sector and gives subsidies to the business
firm sector (like food subsidy, fertiliser subsidy, etc.).
3. Government’s savings goes to the capital market and borrows from the financial system.

Circular Flow of income in a Four-sector economy

Features of external or rest of the world sector are:
1. External sector makes payment to the firm for its exports to rest of the world.
2. External sector gets payments for imports made to firm sector.
3. Household sector exports factor services to rest of the world sector.
4. External sector makes net factor payments to the household sector.

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leakages vs. injections

Injections are additions to the circular flow of income. They increase the size of circular flow. They lead to
expansion in the production process in an economy. Injections are (a) Investments, (b) Exports and (c)
Government purchases.
Leakages are withdrawals from a circular flow of income. It reduces the size of circular flow. It leads to
contraction in the production process in an economy. Contractions are: (a) Savings, (b) Taxes, and (c) Imports.
For stability in the circular flow of income,
Leakages ≡ Injections .... ≡ denotes identity
or S + T + M ≡ I + G + X .... in a 4-sector economy
or [Savings + Taxes + Imports] ≡ [Investment + Government Purchases + Exports]
Classification of industrial sector
It means grouping production units into distinct industrial groups, or sectors. This is the first step required to be
taken in estimating national income, irrespective of the method of estimation. It is statistically more convenient
to estimate national income originating in a group of similar production units rather than for each production
unit separately. It is now a matter of general practice to group all the production units of the economic
territory into three broad groups—primary sector, secondary sector, and tertiary sector. Each of these sectors
can be further subdivided into smaller groups depending upon the requirement. Let us now explain each sector.
Primary Sector: - Primary sector includes production units exploiting natural resources like land, water, subsoil
assets, etc. Growing crops, catching fish, extracting minerals, animal husbandry, forestry, etc. are some
examples. The word ‘primary’ means ‘of first importance’. It is primary because it is a source of basic raw
materials for the secondary sector.
Secondary Sector: - Secondary sector includes production units which are engaged in transforming one good
into another good. Such an activity is called manufacturing activity. These units convert raw materials into
finished goods. Factories, construction, power generation, water supply are the examples. It is called secondary
because it is dependent upon the primary sector for raw materials.
Tertiary Sector: - Tertiary sector includes production units engaged in producing services. Transport, trade,
education, hotels and restaurant, finance, government administration, etc. are some examples. This sector finds
third place because its growth is primarily dependent upon the primary and secondary sectors.
domestic income (Product) vs. national income (Product)
The concept of domestic product is based on the production units located within economic territory, operated
both by residents and non-residents. The concept of national product is based on residents and includes their
contribution to production both within and outside the economic territory.
National product is derived in the following way:
National product = Domestic product + Factor income received from abroad – Factor income paid to abroad.
𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 = 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 + 𝑁𝑒𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑎𝑏𝑟𝑜𝑎𝑑.
Factor income and Transfer income
Factor Income
Factor income refers to income received by factors of production for rendering factor services in the production
process.
• It is received for providing factor services of land, labour, capital and enterprise.
• Factor income of normal residents of a country is included in the national income.
• Examples. Rent, wages, interest and profit.
Transfer Income
Transfer income refers to income received without rendering any productive service in return.
• It is a one-sided concept.
• It is not included in national income as it does not reflect any production of good and services.
• It can be received either within the domestic territory of a country or from abroad.
• Examples. Old age pension, scholarship, unemployment allowance, pocket money, etc.

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methods of measuring national income

The circular flow of creation, distribution and spending of income is taking place simultaneously in an economy,
i.e., income is created, then distributed, then spent and then created and so on. Each way of looking at NI
suggests a different method of calculation. In India, Central Statistical Organisation measures national income
at these three points. The three methods of measuring national income are:
1. Income method
2. Value added or production method
3. Expenditure method.
The three methods give three different angles of looking at the income flow based on different types of data.
Income method measures relative contribution of factor owners. Value added method measures the
contribution of production units to total output of an economy. Expenditure method measures the relative flow
of consumption and investment expenditures.
Income Method
Meaning and Composition of NI by Income Method
𝑵𝒆𝒕 𝑽𝒂𝒍𝒖𝒆 𝑨𝒅𝒅𝒆𝒅 𝒂𝒕 𝑭𝒂𝒄𝒕𝒐𝒓 𝑪𝒐𝒔𝒕 𝒐𝒓 𝑵𝑽𝑨𝑭𝑪
= 𝑆𝑢𝑚 𝑡𝑜𝑡𝑎𝑙 𝑜𝑓 𝑓𝑎𝑐𝑡𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒𝑠 𝑝𝑎𝑖𝑑 𝑜𝑢𝑡 𝑏𝑦 𝑎 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡.
𝑵𝑫𝑷𝑭𝑪 = 𝑆𝑢𝑚 𝑡𝑜𝑡𝑎𝑙 𝑜𝑓 𝑓𝑎𝑐𝑡𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒𝑠 𝑝𝑎𝑖𝑑 𝑜𝑢𝑡 𝑏𝑦 𝑎𝑙𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡𝑠 𝑙𝑜𝑐𝑎𝑡𝑒𝑑
𝑤𝑖𝑡ℎ𝑖𝑛 𝑡ℎ𝑒 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑡𝑒𝑟𝑟𝑖𝑡𝑜𝑟𝑦 𝑜𝑓 𝑎 𝑐𝑜𝑢𝑛𝑡𝑟𝑦.
𝐼𝑡 𝑖𝑠 𝑠ℎ𝑎𝑟𝑒𝑑 𝑏𝑦 𝑏𝑜𝑡ℎ 𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠 𝑎𝑛𝑑 𝑛𝑜𝑛 − 𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠.
𝑵𝑵𝑷𝑭𝑪 𝒐𝒓 𝑵𝑰 = 𝑆𝑢𝑚 𝑡𝑜𝑡𝑎𝑙 𝑜𝑓 𝑓𝑎𝑐𝑡𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒𝑠 𝑝𝑎𝑖𝑑 𝑜𝑢𝑡 𝑡𝑜 𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠 𝑜𝑛𝑙𝑦.
Income method is also called Factor Payment Method or Distributed Share Method. According to income
method, the components of NI are given by the formula.
𝑁𝑁𝑃𝐹𝐶 𝑜𝑟 𝑁𝐼 = 1. 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
+ 2. 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 (𝑟𝑒𝑛𝑡 + 𝑟𝑜𝑦𝑎𝑙𝑡𝑦 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑝𝑟𝑜𝑓𝑖𝑡)
+ 3. 𝑀𝑖𝑥𝑒𝑑 𝑖𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑒𝑙𝑓 − 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + 4. 𝑁𝑒𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑎𝑏𝑟𝑜𝑎𝑑.
𝑵𝑫𝑷𝑭𝑪 𝑶𝑹 𝑫𝒐𝒎𝒆𝒔𝒕𝒊𝒄 𝑰𝒏𝒄𝒐𝒎𝒆 = 1 + 2 + 3
Steps Involved in Calculating NI by Income Method
Step 1. Identification and classification of producing enterprises which employ factor inputs
It requires:
(a) Identifying the producing enterprises which employ the factor inputs and
(b) Classifying the producing enterprises. All producing enterprises can be classified under three
heads:
i. Primary Sector. It is that sector which produces goods by exploiting natural resources like
land, water, forests, mines, etc. This sector includes agricultural and allied activities,
fishing, mining and quarrying.
ii. Secondary Sector. It is also called manufacturing sector. Enterprises in this sector
transform one type of commodity into another type of commodity. For example, leather
goods from leather, flour from wheat, sugar from sugar cane, etc.
iii. Tertiary Sector. It is also known as service sector. Enterprises in this sector produce
services only. Examples are: banking, transport, communications, trade and commerce,
etc.
Step 2. Classification of Factor Income

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Step 3. Estimation of national income

The last step is to estimate or calculate national income

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Precautions to be taken while calculating factor incomes are as follows:

1. Transfer Payments: - Transfer payments should not be included in the national income because
transfers are not a productive activity. A distinction is made between old-age pension and
retirement pension. Old-age pension is a welfare measure and falls under the category of transfer
payment. Retirement pension (or private pension) on the other hand is the payment for services
rendered in the past. It is a part of compensation of employees.
2. Illegal Income: - Income through illegal activities, like smuggling, black marketing, theft, dacoity,
gambling, etc., is not included in the national income. Income earned only by way of legal activities
is included.
3. Income from the Sale of Second-hand Goods or Capital Gains: - Income or money received by
way of selling second-hand goods or financial assets, for example, old scooter, old house, old radio,
bonds, debentures etc., is not included in the national income. The reason is that the value of their
original sale has already been counted in the year of their respective purchase. At present there is
only a change in the ownership of the second-hand goods. It is important to note that brokerage
or commission paid to the brokers or commission agents on the sale and purchase of such goods,
if any, is included, because new factor income is generated.
4. Corporation Tax and Income Tax: - Since corporation tax is a part of profit, it should not be
separately included in the national income. It is important to note that compensation of
employees includes income tax. Thus, income tax paid by the employees should not be included
separately.
5. Indirect Taxes: - Indirect taxes tend to raise the market price of goods and services. Hence, these
are included in the national income at market price.
6. Include Free Services Provided by the Owners of the Production Units: - Owners work in their
own unit but not charge salary. Owners provide finance but do not charge any interest. Owners
do production in their own buildings but do not charge rent. Although they do not charge, yet the
services have been performed. The imputed value of these must be included in national income.
7. Windfall Gains: - In the national income, windfall gains, for example, income from lotteries is not
included. It is unearned income.
8. Wages and Salaries in Cash and in Kind: - As compensation of employees is included in estimation
of national income, any figures on wages and salaries in cash or in kind should not be separately
added.
9. Domestic Services: - Domestic services provided out of love and affection are not included. But if
the same are provided by the paid employed staff such as cooks, gardeners, guards, etc., they will
be included in the national income.
10. Imputed Rent of Owner-occupied Houses: - Rent of owner-occupied houses should be calculated
on the basis of prevailing market price and included in the national income. When a house owner
lives in that house, he does not pay any rent. But in fact, he pays rent to himself. Since rent is a
payment for services rendered, even though rendered to the owner himself, it must be counted
as a factor payment.
11. Death Duties, Gift Tax, Wealth Tax, etc: - Death duties, gift tax, wealth tax, etc. are paid out of
the wealth or past savings of the tax-payers. Hence, they should not be included in the national
income.
Q1. Calculate: (a) NDPFC, (b) NNPFC or NI (c) NNPMP (d) GDPMP using income method.

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Q2. using the income method calculate: (a) Domestic Income, (b) National Income.

Value added method (or Product or output method)

Concept and Measurement of Value Added
In the computation of national income, value added by different enterprises is included and value of output is
not included. Thus, it is crucial to differentiate between these two concepts.
a) Value of Output
Value of output is estimated at current prices prevailing in the market. It is called value of output at
market price. Value of output can be defined in two ways:
1. Value of outputs of a firm is the market value of all goods and services produced by it during
an accounting year. It is obtained by multiplying quantity of output by its market price.
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 = 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 × 𝑃𝑟𝑖𝑐𝑒
2. Value of output of a firm is the sum total of the value of sales of the firm during the year plus
the value of change in stock in an accounting year.
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 = 𝑆𝑎𝑙𝑒𝑠 + 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑡𝑜𝑐𝑘
= 𝑆𝑎𝑙𝑒𝑠 + (𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 – 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘)
Value of output is not included in national income computation.
b) Value Added
Production units produce goods and services. For this purpose, a production unit purchases primary
factor inputs (land, labour, capital and entrepreneurship) and secondary factor inputs (raw materials,
etc.). Value added is then the excess of the value of output produced over the value of secondary inputs.
𝑽𝒂𝒍𝒖𝒆 𝒂𝒅𝒅𝒆𝒅 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 – 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑒𝑐𝑜𝑛𝑑𝑎𝑟𝑦 𝑖𝑛𝑝𝑢𝑡𝑠
𝒐𝒓 𝑽𝒂𝒍𝒖𝒆 𝒂𝒅𝒅𝒆𝒅 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 – 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑚𝑒𝑑𝑖𝑎𝑡𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝒐𝒓 𝑽𝒂𝒍𝒖𝒆 𝒂𝒅𝒅𝒆𝒅 = (𝑆𝑎𝑙𝑒𝑠 + 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑡𝑜𝑐𝑘)– 𝐼𝑛𝑡𝑒𝑟𝑚𝑒𝑑𝑖𝑎𝑡𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
Domestic product = Sum total of value added by all producing enterprises within the domestic territory
c) Types of Value Added
There are two types of value added:
(a) Value added at market price.
(b) Value added at factor cost.
Value added at market price
1. Gross Value Added at Market Price: - The value of goods used for intermediate consumption
was not produced but purchased by the enterprise from some other enterprises. For instance,
a farmer purchases intermediate inputs like seeds, manures, fertilisers, insecticides from other
enterprises. Therefore, to find out the contribution of the enterprise to the current flow of
goods and services, we have to deduct the value of intermediate consumption from the value
of output. By doing so, we get Gross Value added at market price by the enterprise. Gross
value added is defined as value of gross output less value of intermediate consumption.
Gross value added at MP = Value of Output – Value of intermediate consumption
2. Net Value Added at Market Price: - An enterprise uses raw materials and factors and produces
commodities. The value of these commodities is the Gross Value of output at market price. If
the value of intermediate output is deducted from the gross value of output at market price,

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we obtain gross value added at MP. If the value of consumption of fixed capital (depreciation)
is deducted from Gross Value added at MP, we get Net Value Added at MP
Net Value Added at MP = Gross value added at market price – Consumption of fixed capital
3. Net Value Added at Market Price: - An enterprise uses raw materials and factors and produces
commodities. The value of these commodities is the Gross Value of output at market price. If
the value of intermediate output is deducted from the gross value of output at market price,
we obtain gross value added at MP. If the value of consumption of fixed capital (depreciation)
is deducted from Gross Value added at MP, we get Net Value Added at MP.
Net Value Added at MP = Gross value added at market price – Consumption of fixed capital
Value added at factor cost
i. Gross Value Added at Factor Cost: - If net indirect taxes are deducted from gross value added
at market price, then gross value added at factor cost is obtained.
Gross Value Added at Factor Cost = Gross value added at market price (or Gross Domestic
Product at Factor Cost)
ii. Net Value Added at Factor Cost: -From the net value added at MP deduct net indirect taxes,
we get net value added at factor cost.
Net Value Added at FC = Net value added at market price – Net indirect taxes
d) Difference between Value of Output, Value Added and Income Generated
The point of distinction between value of output and value added is the value of intermediate goods
and services. Value of output includes it and value added excludes it.
1. Gross Value Added at Market Price = Value of output – Intermediate consumption
2. If value of output is taken in the computation of national income, it would lead to the problem
of double counting.
Meaning and Composition of NI by Value Added Method
Product method or Value-Added method is also called Industrial Origin method or Net Output method. Value
Added method is defined as that method which measures the national income by estimating the contribution
of each producing enterprise to production in the domestic territory of the country in an accounting year.
National Income = Sum total of net value added at factor cost across all producing units of an economy
NI by Value Added = 1. Gross value added by Primary Sector within the domestic territory
+ 2. Gross value added by Secondary Sector within the domestic territory
+ 3. Gross value added by Tertiary Sector within the domestic territory
– 4. Depreciation
– 5. Net Indirect Taxes
+ 6. Net Factor Income from Abroad
Steps Involved in Calculating NI by Value Added Method
Step 1. Identification and Classification of Producing Enterprises
As in income method, producing enterprises are classified into three heads:
1. Primary sector
2. Secondary or manufacturing sector
3. Tertiary or service sector.
Step 2. Estimation of Gross Value Added
Value added is the market value of only final goods and services. Value of output is excess of value
added over and above the value of intermediate consumption.
Gross value added (GVA) = Value of output – Intermediate consumption
= [Sales + Change in stock] – Intermediate consumption
If intermediate consumption is not subtracted from the value of output, it would lead to the problem
of double counting.
Step 3. Estimation of National Income

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Problem of Double Counting

While estimating national income by value added method, sometimes the value of a product is counted
more than once. It is called double counting. It leads to over estimation of national income.
How to avoid double counting?
There are two alternative methods or ways of avoiding double counting:
1. Value Added Method: - According to this method, first of all identify intermediate
consumption of each producing unit and then calculate value added by each producing unit at
each stage of production by using the following formula:
Value added = value of output – intermediate consumption
2. Final Product Approach: - According to this method, we should take the value of final product
only. Final products are those products which are purchased by consumers for consumption
or purchased by firms (Producing units) for investment.
Precautions Involved in Calculating NI by Value Added Method
I. The sale and purchase of second-hand goods, should not be included in national income because it is
not a productive activity. But commission, or brokerage paid to facilitate the sale of such goods is a
fresh productive activity and should be included.
II. The value of intermediate goods should also not be included in national income. Only the value of final
goods should be included.
III. The value of goods retained for self-consumption should be included, e.g. farmer consumes his own
produce.
IV. Imputed value of owner-occupied house should be included.
V. Own account production of fixed capital by households, firms and the government should be included.
VI. Domestic services are not included in national income. However, production of services by paid
employed persons should be included.
VII. Voluntary work done for its own sake or for the community should be excluded
Q3. Calculate by Value Added Method (a) GVAMP (b) NI.

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Expenditure Method
Meaning and Composition of NI by Expenditure Method
The expenditure method of measuring National Income is also called Income Disposal method or Consumption
and Investment method. Expenditure method is a method which measures the final expenditure on gross
domestic product at market price during an accounting year. This total final expenditure is equal to the gross
domestic product at market price.
According to expenditure method, GDPMP is the aggregate of all the final expenditure in an economy during a
year, i.e.,
𝑌 = 𝐶 + 𝐼 + 𝐺 + (𝑋 – 𝑀)
where,
Y = National Income
C = Private Final Consumption Expenditure
I = Final Investment Expenditure or Capital Formation
G = Government Final Consumption Expenditure
X – M = Net exports (X stands for exports and M stands for imports).
According to the expenditure method, composition of GDPMP is as follows:
1) Private final consumption expenditure
2) Government final consumption expenditure
3) Government fixed investment
4) Business fixed investment
5) Investment on residential construction
6) Inventory Investment or Change in Stock (i.e., Closing stock – Opening stock)
7) Net Exports (Exports – Imports).
GDPMP by expenditure method = 1 + 2 + 3 + 4 + 5 + 6 + 7
Steps Involved in Calculating NI by Expenditure Method
1) Identification of Economic Units Incurring Final Expenditure
There are four categories of economic units which incur final expenditure within the domestic territory
of a country. They are:
1. Household Sector
2. Production Sector
3. Government Sector
4. Rest of the World Sector.
2) Classification of Final Expenditure
The final expenditure is classified into the following three kinds:
1. Final Consumption Expenditure:
i. Private Final Consumption Expenditure.
ii. Government Final Consumption Expenditure.
2. Gross Domestic Capital Formation:
i. Gross Domestic Fixed Investment or Gross Domestic Fixed Capital Formation.
ii. Inventory Investment or Change in Stock.
3. Net Exports.

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The measurement of three components is as follows:

Q1. Final Consumption Expenditure: - It comprises of private final consumption expenditure and
general government final consumption expenditure.
i. Private Final Consumption Expenditure: - To measure private final consumption
expenditure, the volume of final sales of the durable goods, semi-durable goods,
nondurable goods and services to the consumer household and non-profit
institutions serving households is multiplied by retail prices. The direct purchases of
non-resident household made abroad are added. The direct purchase of non-resident
households in the domestic market is not added.
Items included in the measurement are:
a. Purchases of currently produced goods and services (except houses) in the
domestic market.
b. Purchases made by resident households abroad.
c. Wages and salaries received in kind.
d. Value of production (at prevailing market rate) meant for self-consumption
should be added to private final consumption expenditure.
e. Imputed rent of owner-occupied houses should also be included in private
final consumption expenditure.
f. Market purchases of currently produced goods and services.
ii. General Government Final Consumption Expenditure: - Government final
consumption expenditure is estimated as the total expenditure incurred by the
government for producing various services (like health, education, defence) to satisfy
collective wants.
The value of government final consumption expenditure is the sum total of the following items:
A. Compensation of employees paid by the government.
B. Goods and services purchased by the government from domestic market (i.e., intermediate goods).
C. Purchases from abroad.
Note. Tuition fees in schools or nominal charges in government hospital has to be deducted from the
sum of all above-mentioned three items.

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Q2. Gross Domestic Capital Formation: - It includes expenditure on the purchase of final goods by
the producers. The investment expenditure is of two kinds:
i. Gross Domestic Fixed Investment or Gross Domestic Fixed Capital Formation: - It
refers to expenditure on purchasing fixed assets (like machinery) by producers. Fixed
Investment is of three kinds:
a. Business Fixed Investment.
b. Government Fixed Investment.
c. Investment on Residential construction by Households: To measure the
expenditure on construction, the volume of material inputs like steel,
cement, bricks and labour is multiplied by the price paid by the builders. This
is called commodity flow approach.
ii. Inventory Investment: - The expenditure on change in stock is measured by
multiplying the volume of physical change in stock with the market prices of the stock.
The change in stock is estimated by subtracting opening stock from closing stock, i.e.,
Change in Stock = Closing Stock – Opening Stock
Note. Increase in stock with consumer are not included, as all consumer goods are treated as
consumed the moment the consumer acquires them.
Q3. Net Exports: - Net exports is the difference between exports and imports of a country during
the period of one year. It can be positive or negative. It is a part of domestic product.
Net Export = Exports – Imports
i. Exports: - They are defined as goods (like jute, tea, etc.) and non-factor services (like
insurance, shipping, banking, etc.) sold by one country to the other. These are
included in our domestic product.
ii. Imports: - They are defined as purchase of goods and non-factor services from rest
of the world. These are not included in our domestic product.
Net Foreign Investment = Net Exports + NFIA
= (Export – Import) + NFIA.
3) Estimation of NI by Expenditure Method

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Precautions Involved in Calculating NI by Expenditure Method

1) Final expenditure is to be included to avoid double counting. Final expenditure is expenditure on
consumption and investment.
2) Intermediate expenditure like on raw materials, etc. is not included in the calculation of national
income.
3) Expenditure on second-hand goods is not included as they have already been included when they were
purchased originally.
4) Expenditure on shares and bonds is not included because buying financial asset is not a production
activity because financial assets are neither good nor services.
5) Gross investment is included in total expenditure. Gross investment includes replacement investment
and net investment.
6) Expenditure on transfer payments by the government is excluded in total expenditure because transfer
payment is a payment against which no services are rendered therefore, no production takes place.
7) Self-use of own produced final products: - For example, a house owner using the house for self.
Although explicitly he does not incur any expenditure, implicitly he is making payment of rent to
himself. Since the house is producing a service, the imputed value of this service must be included in
national income.

Q4. using expenditure method calculate: (a) NNPMP, (b) NDPMP, (c)Net Domestic Income, and (d) NI.

Q5. Calculate GDPFC and GDPMP from the following data:

Q6. Calculate NNPFC from the following data:

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The Three Methods Reconciled

It is important to state that value of national income is identical in all the three cases calculated by the income
method, the value-added method and the expenditure method.
National Income ≡ National Product ≡ National Expenditure
Where ≡ sign denotes identity. That is, national income is always identical with national product and national
expenditure.
The only difference is that with product method, national income is calculated at creation/ production level,
with income method national income is measured at distribution level and with expenditure method, national
income is measured at disposal level.

Solved Numerical Problems

Q1. From the data given below, calculate National Income:

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Q2. From the following data given below, calculate:

a. Operating Surplus
b. Gross National Product at Market Price.

Q3. On the basis of following data, calculate:

a. National Income,
b. Compensation of Employees.

Q4. On the basis of following data, calculate National Income:

Q5. Calculate (a) Gross Domestic Product at market price and (b) Net National Product at factor
cost from the following data:

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Q6. Calculate (a) Gross National Product at market price and (b) Net National Product at factor
cost from the following data:

Q7. Find out (a) Gross Domestic Product at market price and (b) Net National Product at factor
cost from the following data:

Q8. Find out Operating Surplus from the following data:

Q9. If domestic factor income is ₹1,000 crores and net factor income from abroad is ₹ (–)5 crores,
how much will be the national income?
Q10. Find Operating Surplus from the following data:

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Q11. Calculate Gross Value Added at factor cost from the following data:

Q12. From the following data calculate NDP at factor cost:

Q13. From the following data, calculate National Income:

Q14. From the following data calculate NFIA:

Q15. Calculate GDPFC from the following data:

Q16. Estimate (a) Gross value added or GDPMP by primary, secondary and tertiary sectors, (b)
National income (NNPFC).

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Q17. On the basis of the following information calculate: (a) Net value added at factor cost, (b)
Gross domestic product at market price.

Q18. On the basis of information given below, calculate GDP:

Q19. From the national accounts for the year 1990 at current prices we have the following
information. Compute the value of (a)NNP at MP (b) GNP at MP (c)GNP at FC (d)NDP at FC.

Q20. The figures given below pertain to 1994–95. Compute (a) Depreciation, (b)Net factor income
from abroad, (c) Subsidies, (d) NDP at factor cost.

Q21. From the given information, estimate GNPMP:

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Q22. From the following data, calculate Net Indirect Taxes and NDPFC:

Q23. In a hypothetical economy, only the following transactions take place. Firm A sells all of its
product worth ₹4,000 crores to firm B. Firm B sells its entire output for ₹8,000 crores to firm C.
Firm C sells his goods for final demand at ₹14,000 crores, (a) Calculate value added by each firm.
(b) An Indirect tax of 20% is levied on A’s product. The burden of this tax is shifted on to the
consumers. Determine the market price of the goods. (c) A subsidy of ₹50 crores is given to B.
As a result, it reduced the price of its output. Determine the market price of the output of the
three firms again.
Q24. Calculate the values of GNPMP and GNPFC.

Q25. Calculate gross value added at factor cost from the following:

Q26. From the following given data determine the values of (a) GDPMP (b)GNPFC (c)NNPMP (d)NNPFC.

Q27. From the data given below find out the Net Value Added at factor cost:

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Q28. Calculate (I) National Income with the help of Income Method, (ii) GDP at Factor Cost from
the data using Expenditure Method.

Q29. From the data given below calculate (I) Gross Domestic Product at Market Price by Income
Method, (ii) NI by Expenditure Method.

Q30. Calculate National Income on the basis of the following data:

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Q31. Calculate Gross Domestic Product at Market Price from the data:

Q32. Calculate (I) GDP at MP by Income Method and (ii) NNP at FC by Expenditure Method.

Q33. Calculate (I) GDP at MP by Income Method and (ii) NNP at FC by Expenditure Method A sells
his goods to B for ₹800 and for private final consumption for ₹400. B sells his goods for ₹.1000
to C. C sells his goods to private final consumption for ₹1,150. Find out Gross Value Added at
Market Price.
Q34. Calculate GDPMP and GNPMP by income method.

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Q35. Calculate GDPFC and National Income by Income Method.

Q36. Calculate GDPMP GDPFC and GNPFC by Expenditure Method.

Q37. Calculate the Total Value of Production both at Current and Constant Prices.

Q38. Find the Value of Output and GVA at MP from the following data.

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Q39. Given the following transactions, calculate the National Product. Firm X sells goods worth ₹
600 to Firm Y and goods worth ₹ 400 to firm Z. Firm Y sells finished goods worth ₹ 250 for final
consumption and goods of ₹500 to firm Z. Firm Z sells its product for ₹ 2,800 to households.
Q40. Industry A sells its entire output of ` 500 crores to Industry B. B adds a value of ₹100 crores to
it and sells half of its output to industry C and the rest of it to private consumers. C adds the
same value as B to its intermediate inputs and sells it for final consumption. Determine Gross
Value Added by each industry.
Q41. For the given economy, calculate (I) GNP at MP, (ii) NNP at MP, (iii) GDP at MP, (iv) NDP at
MP, (v) GNP at FC, (vi) NNP at FC, (vii) GDP at FC, (viii) NDP at FC. Industry A imports goods for
₹200 and sells to B for ₹500, and to C for ₹300 and for final consumption goods worth ₹1,200.
Industry B sells goods for ₹300 to C and for ₹2,000 to households. C sells goods for ₹3,000 to
consumers and export goods worth ₹1,000. Depreciation amounts to ₹50 and indirect taxes add
upto ₹75, Subsidies are worth ₹75.
Q42. There exist four industries in an economy such that the value of output of each is the same.
Intermediate consumption expenditure of the four industries are ₹ 500, 1,000, 2,000, 2,500 in
crores. If the total value of output in the economy is ₹ 30,000 crores, calculate the Value Added
by each industry and the National Product.
Q43. Firm A sells its output to firm B for ₹500 crores. Firm B sells its product to firm C for ₹800
crores. Firm C sells all of its output to private consumption for ₹1,200 crores. (I) What is the
value of National Product and the value added by each industry? (ii) If A’s imports amount to
₹50 crores, what will be the value of National Product? (iii) If firm A imports goods for ₹100
crores and firm C exports goods for ₹200 crores, find the value of National Product.
Q44. Find out (i) NDP at Factor Cost by Expenditure Method and (ii) GDP at Market Price by Income
Method from the data given below:

Q45. Calculate GNP at MP:

Q46. Calculate National Income by Income Method from the given data:

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Q47. Calculate GDPMP from the given data:

Q48. Calculate GDPMP from the given data:

Q49. Calculate GDP at Market Price by the (i) Income and (ii) Expenditure Methods from the
following data:

Q50. From the data given below calculate National Income by (i) Income Method, (ii)Expenditure
Method and (iii) GNPFC.

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Q51. Calculate GNP at MP by the Income and Expenditure Method:

Q52. With the help of the information given below estimate GNP at MP:

Q53. NDP at market price is ₹2,400 crores, the capital stock of the country is worth ₹400 crores and
depreciation is 10% per annum. Indirect taxes amount to ₹120 crores and subsidies equal to
₹20 crores. Factor income from the rest of the world is ₹400 crores and to the rest of the world
is ₹600 crores. Calculate Gross National Product at Factor Cost
Q54. From the information given below calculate (i) GDP at FC and (ii) National Income:

Q55. From the following data, estimate the Value Added:

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Q56. Calculate National Income by Income and Expenditure Method from the following data:

Q57. Find Net Domestic Product at Market Price from the following data:

Q58. From the following data calculate Gross National Product at Factor Cost:

Q59. Calculate Net Value Added at Market Price from the following data:

Q60. Calculate (i) GNP at MP by Expenditure Method and (ii) GDP at MP by Income Method:

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Q61. Find out Net Value Added at Factor Cost by an enterprise on the basis of following data:

Q62. From the given data for a firm find out Net Value Added at Factor Cost:

Q63. Calculate: (i) Gross Value Added at Factor Cost, (ii) Value of Gross Product, (iii) Value of Net
Product at Market Price, (iv) Net Value Added at Factor Cost:

Q64. Gross national product at market price is ₹ 2,000 crores and the capital stock are worth ₹4,000
crores. The capital stock depreciates at 12.5% per annum. Factor income from abroad is ₹400
crores and to abroad is ₹600 crores. Indirect taxes amount to ₹200crores and subsidies are ₹30
crores. Find out:
a. NDP at MP
b. NDP at FC
Q65. Use expenditure method to calculate Net National Product

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Q66. Find out Gross Domestic Product at Market Price according to both Income Method and
Expenditure Method. Show that the result shown by both the methods is the same:

Q67. Estimate NI by Expenditure Method:

Q68. From the data given below, calculate: (i) National Income with the help of Income Method
and (ii) Gross Domestic Product at Factor Cost with the help of Expenditure Method:

Q69. From the data given below, calculate (i) Gross National Product at Market Price by Expenditure
Method and (ii) Gross Domestic Product at Market Price by Income Method

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Q70. From the following data calculate (i) Gross National Product at factor cost and (ii) Net National
Disposable Income:

Q71. From the following data, calculate “national income” by (a) income method and (b)
expenditure method:

Q72. From the following data, calculate National Income by Income and Expenditure method:

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Q73. There are only two producing sectors A and B in an economy. Calculate (a) Gross value added
at market price by each sector, (b) National income.

Q74. Calculate National Income, and Gross National Disposable Income:

Q75. Calculate Gross National Product at Market Price and Net National Disposable Income:

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Q76. Calculate Gross National Product at Market Price and Net National Disposable Income:

Q77. Find National Income and Net National Disposable Income:

Q78. Calculate (a) Gross domestic product at market price and (b) Factor income from abroad from
the following data:

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Q79. Calculate National Income and Gross National Disposable Income from the following:

Q80. Calculate Net National Product at Market Price and Gross National Disposable Income:

Q81. Calculate (a) ‘Gross National Product at Market Price’ and (b) ‘Personal Disposable Income’
from the following:

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Q82. Calculate (a) ‘Net National Product at Market Price’ and (b) ‘Private Income’ from the
following:

Q83. Calculate (a) ‘Net Domestic Product at Factor Cost’ and (b) ‘Private Income’ from the
following:

Q84. Calculate National Income and Personal Disposable Income from the following:

Q85. Find out (a) national income and (b) net national disposable income:

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Q86. Find out (a) Gross National Product at Market Price and (b) Net Current Transfers to Abroad:

Q87. Find out (a) Net National Product at Market Price and (b) Gross National Disposable Income:

Q88. Find out (a) Net National Product at Market Price and (b) Gross National Disposable Income:

Q89. Find out (a) Gross National Product at Market Price and (b) Net Current Transfers from
Abroad:

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Q90. Find out (a) Net National Product at Market Price and (b) Gross National Disposable Income
from the following:

Q91. Find out (a) National Income and (b) Net National Disposable Income:

Q92. Find out (a) Gross National Product at Market Price and (b) Net Current Transfers from
Abroad:

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Q93. Find out (a) National Income and (b) Net National Disposable Income:

Q94. Calculate Gross Value Added at Factor Cost.

Q95. Find Net Value Added at Market Price:

Q96. Find out Net Value Added at Factor Cost:

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Q97. Find Gross Value Added at Factor Cost:

Test Your Knowledge

Very Short Answer Type Questions (1 Mark)
Q1. What are leakages?
Q2. What are injections?
Q3. What is a circular flow?
Q4. Define net indirect taxes.
Q5. What are subsidies?
Q6. Name items not included in GNPMP.
Q7. What is net factor income from abroad?
Q8. How is NDPMP calculated?
Q9. If we deduct NDPFC from NDPMP , what do we get?
Q10. Is stock of inventories included in NI ?
Q11. Are pension on retirement, dividend and bonus included in NI?
Q12. Give two examples of income that are excluded from income method.
Q13. Give two examples of items that are excluded from value added method.
Q14. Give two examples of items that are excluded from expenditure method.
Q15. Define double counting.
Q16. Give three examples of primary sector.
Short Answer Type Questions (3/4 Marks)
Q1. Give the components of national income by income method.
Q2. Give the components of national income by value added method.
Q3. Give the components of national income by expenditure method.
Q4. What precautions should be taken in estimating NI by income method?
Q5. What precautions should be taken in estimating NI by expenditure method?
Q6. What precautions should be taken in estimating NI by value added method?
Q7. What will happen if the value of intermediate consumption is included in NI?
Q8. Fill in the blanks
a. NNPFC = NDPFC + ___________.
b. ___________ = GDPFC + net indirect taxes.
c. ___________ = NNPFC + depreciation.
d. GDP = NDP + ___________.
Q9. What is change in stock? How do we calculate it?
Q10. What type of data is required to measure NI by each of the three methods?
Q11. Explain value added method of calculating national income.
Q12. Explain expenditure method of calculating national income.
Q13. How can the three methods of measuring national income be reconciled?
Q14. Differentiate between NDPMP and NNPMP.

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Q15. Are the following included in NI and why?

a. Sale of an old house.
b. Free meals given to an employee.
c. Services of owner-occupied houses.
d. Purchase of car by a household.
Q16. Giving reason, explain how the following should be treated while estimating national income:
a. Payment of excise duty by a firm.
b. Payment of interest by a firm.
Q17. How should the following be treated while estimating national income? Give reasons for your answer.
a. Festival gift from an employer.
b. Rent free house from an employer.
Q18. Giving reason, explain how the following should be treated while estimating national income:
a. Free medical facilities by the employer.
b. Contribution to provident fund by employees.
Q19. Giving reason, explain how should the following be treated while estimating national income:
a. Expenditure on free services provided by government.
b. Payment of interest by a government firm.
Q20. How should the following be treated while estimating National Income? Give reasons.
a. Expenditure on education of children by a family.
b. Payment of electricity bill by a school.
Q21. Giving reason, explain how should the following be treated in estimating national income:
a. Interest paid by banks on deposits by individuals.
b. National debt interest.
Q22. Giving reason, explain how should the following be treated while estimating national income:
a. Payment of bonus by a firm.
b. Payment of interest on a loan taken by an employee from the employer.
Q23. Why are net exports included in national income? Explain.
Q24. Explain the circular flow of income.
Long Answer Type Questions (6 Marks)
Q1. Describe the circular flow of income in a three-sector economy with financial system.
Q2. Explain the concept of injections and leakages.
Q3. Give meaning of circular flow of income. What are its different types? Explain its significance.
Q4. Explain the circular flow of income in a four-sector economy.
Q5. Giving reasons, explain how the following are treated while estimating national income:
a. Payment of fees to a lawyer engaged by a firm.
b. Rent-free house to an employee by an employer.
c. Purchases by foreign tourists.
Q6. Give reasons, explain how the following are treated in estimating national income:
a. Wheat grown by a farmer but used entirely for family’s consumption.
b. Earnings of the shareholders from the sale of shares.
c. Expenditure by government on providing free education.
Q7. Explain the circular flow of income
Q8. Give reasons and explain how the following are treated in estimating National Income:
a. Purchase of a truck to carry goods by a production unit.
b. Payment of income tax by a production unit.
c. Services rendered by family members to each other.
Q9. Are the following a part of a country’s ‘net domestic product at market price’? Explain.
a. Net indirect taxes.
b. Net exports.
c. Net factor income from abroad.
d. Consumption of fixed capital.
Q10. Are the following included in national income? Give reasons for your answer.
a. Dividends received on shares.

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b. Money received from sale of shares.

c. Gifts received from employer.
d. Interest on public debt.
Q11. How will you treat the following while estimating domestic factor income of India?
a. Remittances from non-resident Indians to their families in India.
b. Rent paid by the embassy of Japan in India to an Indian resident.
c. Profits earned by branches of foreign bank in India.
Q12. How will you treat the following while estimating national income of India? Give reasons for your
answer.
a. Salaries received by Indian residents working in Russian Embassy in India.
b. Profits earned by an Indian bank from its branches abroad.
c. Entertainment tax received by the government.
Q13. How will you treat the following while estimating national income of India? Give reasons for your
answer.
a. Salaries paid to Russians working in Indian Embassy in Russia.
b. Profits earned by an Indian company from its branch in Singapore.
c. Capital gains to Indian residents from sale of shares of a foreign company.
Q14. While estimating national income, how will you treat the following? Give reasons for your answer.
a. Imputed rent of self-occupied houses.
b. Interest received on debentures.
c. Financial help received by flood victims.
Q15. How will you treat the following while estimating national income? Give reasons for your answer.
a. Capital gain on sale of a house.
b. Prize won in a lottery.
c. Interest on public debt.
Q16. While calculating national income of India from its domestic factor income, how will you treat the
following? Give reasons for your answer.
a. Salaries received by Indian working in branches of foreign banks in India.
b. Profits earned by an Indian bank from its branches abroad.
c. Rent paid by embassy of Japan in India to an Indian resident.
Q17. State whether the following statements are true or false. Give reasons for your answer:
a. Capital formation is a flow.
b. Bread is always a consumer good.
c. Nominal GDP can never be less than Real GDP.
d. Gross domestic capital formation is always greater than gross fixed capital formation.
Q18. Give reason, whether the following are included in national income:
a. Profits earned by branch of a foreign bank.
b. Interest paid by an individual on a loan taken to buy a car.
c. Expenditure on machines for installation in a factory.
Q19. Give reason and explain whether the following are included in domestic product of India:
a. Profits earned by a branch of foreign bank in India.
b. Payment of salaries to its staff by an embassy located in New Delhi.
c. Interest received by an Indian resident from firms abroad.
Q20. How will you treat the following in estimating national income of India? Give reasons for your answer.
a. Value of bonus shares received by shareholders of a company.
b. Fees received from students.
c. Interest received on loan given to a foreign company in India.
Q21. How will you treat the following while estimating national income of India?
a. Dividend received by an Indian from his investment in shares of a foreign company.
b. Money received by a family in India from relatives working abroad.
c. Interest received on loans given to a friend for purchasing a car.
Q22. How will you treat the following while estimating national income of India? Give reasons for your
answer.

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a. Dividend received by a foreigner from investment in shares of an Indian company.

b. Profits earned by a branch of an Indian bank in Canada.
c. Scholarship given to Indian students studying in India by a foreign company.
Q23. Giving reasons, state whether the following statements are true or false.
a. Real gross domestic product can be equal to nominal gross domestic product.
b. Savings are a stock.
c. Butter is only a final product.
Q24. How will you treat the following in the calculation of Gross Domestic Product of India? Give reasons for
your answer.
a. Profits earned by a branch of foreign bank in India.
b. Salaries of Indian employees working in embassy of Japan in India.
c. Salary of residents of Japan working in Indian embassy in Japan.
Q25. How will you treat the following while calculating domestic product of India? Give reasons for your
answer.
a. Profits earned by a foreign company in India.
b. Salary of Indian residents working in Russian Embassy in India

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