There are three different methods of measuring national income—(1) The Output method, (2) The Income Received method and (3) The Consumption-Savings method.
Under the Output Method the net value of all commodities and services of the country are added together.
In calculating national income by this method, certain precautions must be taken. To avoid the danger of double counting, intermediate goods should be excluded and only final goods should be considered.
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For example, when the value of bread is counted, the value of wheat contained in it is accounted for. Secondly, the net gain from international trade must be added to the value of the total products. Thirdly, net capital formation in the given period should be included while depreciation must be excluded.
Under the Income-Received method we may say that the national income is the sum total of income earned by owners of the various productive factors: wages of workers plus net interest on capital, plus net rent and royalties, plus corporate profits plus net income of unincorporated enterprise.
In calculating factor payments total transfer payments should be excluded. Only those payments should be included which represent a cost payment to a factor of production for a contribution towards production.
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Under the Consumption-Savings method we calculate the total income by adding up the total consumption expenditure and the total amount of savings in any given period.
This is no independent method but a different way of putting the income method since total expenditure of the community on consumption and investment must be equal to the community’s total income.