National income refers to the total value of all goods and services produced within a country’s borders during a particular period, usually a year. Gross Domestic Product (GDP) is a measure of the total economic output of a country, which is the sum of all final goods and services produced within the country during a particular period.
Computation of GDP:
There are three methods to compute GDP – the production approach, the income approach, and the expenditure approach. All three methods should yield the same result when correctly calculated.
- Production Approach: The production approach measures GDP as the sum of the value added at each stage of production. In other words, it calculates GDP by adding up the value of all final goods and services produced in a country, subtracting the value of intermediate goods used in production.
- Income Approach: The income approach measures GDP as the sum of all incomes earned in the economy during the year. This includes all wages, salaries, profits, and rent earned by households and firms. The income approach also includes indirect taxes such as excise duties and subsidies.
- Expenditure Approach: The expenditure approach measures GDP as the sum of all final goods and services purchased in the economy. This includes consumption expenditure, investment expenditure, government expenditure, and net exports (exports minus imports).
The formula to calculate GDP is:
GDP = C + I + G + (X-M)
Where C is consumption expenditure, I is investment expenditure, G is government expenditure, X is exports, and M is imports.
Computation of National Income:
National income is the sum of all the income earned by individuals and businesses in a country during a particular period. There are two methods to compute national income – the income method and the expenditure method.
- Income Method: The income method adds up all the income earned by households and businesses in the economy, including wages, salaries, rent, interest, and profits. The income method includes indirect taxes such as excise duties and subsidies.
- Expenditure Method: The expenditure method calculates national income as the sum of all the final goods and services purchased by households and businesses. This includes consumption expenditure, investment expenditure, and government expenditure.
The formula to calculate national income is:
National Income = Compensation of Employees + Gross Operating Surplus + Net Interest + Net Mixed Income + Taxes on Production and Imports – Subsidies
Where compensation of employees includes wages and salaries, gross operating surplus includes profits, net interest includes interest payments minus interest received, net mixed income includes income earned by self-employed individuals and small businesses, and taxes on production and imports includes indirect taxes such as excise duties.
In India, the Central Statistical Office (CSO) is responsible for computing national income and GDP. The CSO publishes national income and GDP data annually, as well as quarterly estimates of GDP. These estimates are used by policymakers, businesses, and researchers to analyze and understand the state of the economy.