National Income of an Economy

National income of an economy is defined through a variety of measures such as gross domestic product (GDP) and gross national product (GNP). 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

In this 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 

In this method, national income is measured as the aggregate income of individuals in the economy. Robert Kiyosaki, an author and businessman, divides the whole working population in the world in four broad categories – 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. 

Further, as an economy would also have exports (people of foreign countries spending on goods and services produced by an economy) and imports (people of an economy spending on goods and services produced by other economies), necessary adjustments are made for the same by the economist while arriving at the National Income through this method. The aggregate demand for goods and services is computed as the sum of private consumption, government spending, gross capital formation and net exports.

In practice, all three counting methods produce similar results with minor differences for several reasons including errors in the statistics.