Posted by Anjali Kaur on Aug 31, 2020

Precautions While Calculating National Income

Under national income, we discussed 3 methods namely: value-added method, income method, and expenditure method. You can revise these methods before learning the precautions of each method while calculating national income. Let’s start.

Precautions

A. Value Added Method

  1. Intermediate goods are not to be included in the national income because such goods are already included in the value of final goods.
  2. Sale and purchase of second-hand goods are not included because they were included in the year in which they were produced and they do not add to the current flow of goods and services.
  3. Production of services for self-consumption is not included because these services are produced and consumed at home and never enter the market place that is why they are called a non-market transaction.
  4. Production of goods for self-consumption will be included as they contribute to the current output of goods and services.
  5. The imputed value of owner-occupied houses should be included like rent is to be included in the calculation of national income.
  6. Change in the stock of goods will be included because it is a part of capital formation.

B. Income Method

  1. Transfer income like scholarships, donations, old-age pensions, charity, etc. are not to be included in the national income because such receipts are not connected with any productive activity and there is no value addition in the economy.
  2. Income for sale of second-hand goods is not included in national income because they are already counted in the original sale. But brokerage or commission will be included.
  3. Income from the sale of shares and debentures will not be included because such transactions do not contribute to the current flow of goods and services. These assets are just paper claims, involving a change of titles only.
  4. Windfall gains like income from lotteries, horse race, etc. are not included because there is no productive activity with them.
  5. The imputed value of services provided by owners of production units will be included.
  6. Change in the stock of goods will be included because it is a part of capital formation.

C. Expenditure Method

  1. Expenditure on intermediate goods will not be included in national income because it is already included in the value of final expenditure.
  2. Transfer payments are not included because they are not connected with any productive activity and there is no value addition.
  3. The purchase of any second goods will not be included as such expenditure has already been included when they were originally purchased.
  4. Purchase of final assets like shares, debentures, bonds, etc. will not be included as such transactions do not contribute to the current flow of goods and services.
  5. Expenditure on own account production like self-consumption, rent, etc. will not be included in national income as these are a part of productive activity.

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