NISM Series XV : Research Analyst Certification Exam Notes
Page 31 Of 62
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Computation of these numbers is a humongous task in terms of data-collection and its processing. Broadly stating, national income of an economy can be measured through three methods: (i) Product Method (ii) Income Method, and (iii) Expenditure Method.
Product Method - national income is measured as an aggregated flow of goods and services in the economy from the different sectors: agriculture, industry and services. Economists calculate money value of all final goods and services produced in the economy during a specified period. Final goods refer to only those goods which are consumed by economy participants and not the ones used in further production processes (intermediate goods). Product method deals with the economy sector-wise. The total output in the economy is computed as the sum of the outputs of various sectors
Income Method - national income is measured as the aggregate income of individuals in the economy. 4 broad categories of Individuals - Employees (labour and other employees), Professionals, Entrepreneurs and Investors. Employees earn wages and salaries, Professionals earn their income based on their services, Entrepreneurs earn profits (including undistributed corporate profits) and Investors earn return on their capital and rent on their land. Sum of all these incomes for a specified period is called National Income for the economy.
Expenditure Method - As all the goods and services produced in an economy are bought (consumed) by someone, National Income may also be calculated from the consumption end. Expenditure method attempts to undertake the same philosophy while computing the National Income. Consumers in an economy are broadly divided into three categories - individuals, corporates and government.
Savings and Investments - there are 3 constituents in an economy - Individuals, Corporates and Government. Savings, defined as income over expenses, are computed for all three categories separately. Savings of individuals is called 'personal savings', savings of corporates (undistributed profits) is called 'corporate savings' and savings of government is called public savings (rarely there; governments generally run budget deficits). Individuals and corporate entities may be clubbed together as private savings. Economists arrive at National Saving by summing savings of these three constituents - personal, corporate and public savings
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