Which of the following is NOT one of the methods of national income estimation?

The correct answer is Banking method.

Key Points

• National income is the total value of a country’s final output of all new goods and services produced in one year.
• Methods of measuring national income are:

1. Expenditure Method - Under this method, we estimate the disposal of income on the purchase of final goods and services.
2. Income Method - The Income Method measures national income from the side of payments made to the primary factors of production in the form of rent, wages, interest, and profit for their productive services in an accounting year. 
3. Production method - In this method, national income is measured as a flow of goods and services. This method is also called an output method.

Additional Information

• Measurement of National Income
  • There are three methods to measure national income:
    1. Income Method
    2. Production (Value-Added) Method
    3. Expenditure Method
  • Measurement of National Income – Income Method
    • Estimated by adding all the factors of production (rent, wages, interest, profit) and the mixed-income of self-employed.
    • In India, one-third of people are self-employed
    • This is the ‘domestic’ income, related to the production within the borders of the country
  • Measurement of National Income – Production Method
    • Estimated by adding the value added by all the firms.
    • Value-added = Value of Output – Value of (non-factor) inputs
    1. This gives GDP at Market Price (MP) – because it includes depreciation (therefore ‘gross’) and taxes (thus ‘market price’)
    2. To reach National Income (that is, NNP at FC)
    • Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
    • Subtract Depreciation: NNP at MP = GNP at MP – Dep
    • Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT
  • Measurement of National Income – Expenditure Method
    • The expenditure method to measure national income can be understood by the equation given below: 
      • Y = C + I + G + (X-M),
      • where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G = Govt’s expenditure on final consumer goods, I = Investment or Capital Formation, X = Exports, X- M = Net Exports (difference between exports (X) and imports (M))

Important Points

• GDP: Gross Domestic Product is the sum of the money of all the final goods and services produced solely within the boundaries of a country, at a specific time.
  • GDP includes the income of foreigners staying in the country.
  • It excludes the income of nationals of the country staying abroad and also excludes the remittances sent from abroad.
• GNP: Gross National Product is the sum of the money of all the final goods and services produced both within and outside of a country by nationals during a specific period of time.
  • GNP includes remittances.
  • It excludes income generated locally by non-nationals.