National Income Calculation Methods

Value Added Method

• Value Added = Value of Output - Value of Intermediate Consumption
• Value of Output = Sales + Change in Stock
• Change in Stock = Closing Stock - Opening Stock
• Intermediate Consumption includes single-use producer goods, raw materials, and intermediate costs.
• If multiple firms: GDPMP = Sum of GVAMP of all firms. If single firm: GVAMP = GDPMP.
• $GDPMP = Sales + Change\ in\ Stock - Intermediate\ Consumption$
• $NNPFC = Sales + Change\ in\ Stock - Intermediate\ Consumption - Depreciation + NFIA - NIT$
• Net indicator = Gross indicator - Depreciation
• Gross indicator = Net indicator + Depreciation
• Domestic Income = National Income - NFIA
• National Income = Domestic Income + NFIA
• Market Price = Factor Cost + NIT
• Factor Cost = Market Price - NIT
• Depreciation alternatives: Consumption of fixed capital, Current Replacement Cost, Capital Loss
• $Depreciation = GDCF - NDCF$
• Net Current/Capital Transfers: Not included - transfer incomes.
• National Debt Interest: Part of Private Income, not National Income.

Income Method

• $NDPFC$ (Domestic Income) = Compensation of Employees + Operating Surplus + Mixed Income
• Compensation of Employees:
  • Wages and Salaries in Cash/Kind
  • Employer's Contribution to Social Security Schemes.
  • Retirement Pensions (Included), Old Age Pensions (Excluded).
• Operating Surplus:
  • Rent
  • Royalty
  • Interest
  • Profit (Dividend, Corporate Profit Tax, Undistributed Profit)
• Profit Before Tax = Profit After Tax + Corporate Tax (if given separately)
• Mixed Income: Income of Self-Employed
• $National\ Income = NDPFC + NFIA$

Expenditure Method

• National Income measured by total expenditure on final goods and services.
• Components:
  1. Private Final Consumption Expenditure:
     • Expenditure on goods/services, resident households abroad, in-kind compensation, self-consumption.
  2. Government Final Consumption Expenditure:
     • Compensation to employees, purchases from abroad/domestic market.
  3. Investment Expenditure:
     • Gross Fixed Investment (Business, Government, Households)
     • Inventory Investment: Change in Stock
       • $Change\ in\ Stock = Closing\ Stock - Opening\ Stock$
  4. Net Exports: Exports - Imports
• Imports are deducted as they aren't domestic production.
• $GDPMP = Private\ Final\ Expenditure + Government\ Expenditure + Investment\ Expenditure + Net\ Exports$
• $NDPMP = GDPMP - Depreciation$
• $NDPFC = NDPMP - Net\ Indirect\ Taxes$
• $NNPFC = NDPFC + NFIA$
• $NNPFC = GDPMP - Depreciation - Net\ Indirect\ Taxes + NFIA$

Gross Domestic Capital Formation

• Calculations:
  1. Net Domestic Capital Formation + Depreciation
  2. Net Domestic Fixed Capital Formation + Change in Stock + Depreciation
  3. Gross Domestic Fixed Capital Formation + Change in Stock

GDP Deflator

• $GDP\ Deflator = (Nominal\ GDP / Real\ GDP) * 100$
• Measures change in GDP due to price level changes.
• GDP Deflator > 1: Prices higher than base year.
• GDP Deflator < 1: Prices lower than base year.
• GDP Deflator = 1: Prices same as base year.

Precautions for Value Added Method

• Exclude the value of second-hand goods (except commission). Include own account production and production for self-consumption.
• Exclude value of intermediate goods.

Precautions for Income Method

• Include services rendered. Exclude transfer payments, illegal income, lottery income and separate tax figures.
• Include imputed rent of self-occupied house.
• Exclude receipts from the sale of land; earnings of shareholders from share sales; value of bonus shares.

Precautions for Expenditure Method

• Exclude purchased of second hand machinery from abroad, payment of electricity bill by a school ,Expenditure on engine oil by car service station, Purchase of bonds by a domestic firm.
• Include purchase of goods by foreign tourist
• Include Expenditure on advertisement and scientific research by a firm