NATIONAL INCOME CALCULATION , TOTAL OUT PUT METHOD

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About national income 

National income is the total amount of income generated by a country in a given time period. It is a measure of a country’s economic activity and its overall economic well-being. National income can be calculated using various methods, but in this blog, we will focus on the total output method, which is one of the most commonly used methods.

Total Output Method explained:

The total output method, also known as the value-added method, calculates national income by adding up the value of all goods and services produced in a country during a particular period. This method takes into account the value added at each stage of production, from raw materials to finished products.

The formula for calculating national income using the total output method is as follows:

National Income = Gross Domestic Product (GDP) at Market Prices – Indirect Taxes + Subsidies

GDP at market prices is the total value of all final goods and services produced within a country’s borders during a given period. Indirect taxes are taxes on goods and services that are included in the price of the product, such as sales tax. Subsidies are payments made by the government to businesses to encourage production or consumption.

Real-Life Examples national income calculation through total output method:

Let’s take the example of a car manufacturing company to understand the total output method. The company purchases raw materials such as steel, plastic, and rubber, which it then processes into car parts. These car parts are then assembled into finished cars, which are sold to customers.

At each stage of production, value is added to the raw materials. For example, the value of steel increases when it is processed into car parts, and the value of the car parts increases when they are assembled into a finished car. The total value of all the car parts and the finished car is the company’s output. This output contributes to the country’s GDP, and the value-added at each stage of production is taken into account when calculating national income using the total output method.

Pakistan’s Example of national income calculation through total output method:

Pakistan is a developing country with a population of over 231.4 million people. The country’s economy is dominated by agriculture, which accounts for more than 20% of GDP. Other major industries in Pakistan include textiles, pharmaceuticals, and construction.

According to the World Bank, Pakistan’s GDP in 2020 was $348.3 billion USD (2021) billion. To calculate national income using the total output method, we need to subtract indirect taxes and add subsidies. In Pakistan, the indirect taxes include sales tax, customs duty, and excise duty, among others. The subsidies provided by the government in Pakistan include subsidies on electricity and gas, as well as subsidies on agricultural inputs.

Key points about Total Output method

1. The total output method is also known as the value-added method.
2. It calculates national income by adding up the value of all goods and services produced in a country during a particular period.
3. The value-added at each stage of production is taken into account when calculating national income using this method.
4. It provides a comprehensive measure of a country’s economic activity.
5. To calculate national income using the total output method, indirect taxes are subtracted, and subsidies are added.
6. The total output method is widely used in economic analysis and is one of the most commonly used methods for calculating national income.
7. It helps to identify the contribution of different sectors to a country’s economy.
8. The method can be applied to both goods and services and takes into account the value-added at each stage of production.
9. The total output method is useful for comparing the economic activity of different countries and assessing their economic growth.
10. The method is a key tool for policymakers and economists to understand a country’s economic performance and plan for its future development.

YouTube lecture on total output method

https://www.youtube.com/watch?v=NX9YGyTevy4&t=254s

Importance of calculating GDP through Total output method 

The total output method is a crucial tool for calculating national income, and it plays an important role in economic analysis. Here are some of the key reasons why the total output method is essential for measuring a country’s economic activity:

1. Comprehensive measure of economic activity: The total output method provides a comprehensive measure of a country’s economic activity by taking into account the value added at each stage of production. It helps to identify the contribution of different sectors to a country’s economy.
2. Standard measure: The total output method is a standard measure of economic activity, and it provides a basis for comparing the economic performance of different countries over time.
3. Understanding of economic growth: The total output method is a critical tool for understanding a country’s economic growth. It helps policymakers and economists to identify the strengths and weaknesses of an economy and plan for its future development.
4. Effective policy-making: The total output method helps policymakers to formulate effective economic policies. It provides an accurate measure of economic activity, which is essential for designing policies that can boost economic growth, create jobs, and improve the standard of living for the population.
5. Comparison of different sectors: The total output method allows for the comparison of different sectors of the economy. It helps to identify the sectors that are growing and those that are declining, which is essential for policymakers to allocate resources effectively.
6. Planning and forecasting: The total output method is used for planning and forecasting economic activity. It allows policymakers and businesses to make informed decisions based on accurate data, which can help to reduce risks and increase the chances of success.
7. Identifying potential issues: The total output method can help to identify potential issues in the economy. For example, if there is a decline in the output of a particular sector, it may indicate that there are problems with that sector, such as lack of investment or competition.

A practice case study on Total output method 

Suppose a country produces three goods: cars, computers, and furniture. The value of all cars produced in a year is $10 billion, the value of all computers produced is $8 billion, and the value of all furniture produced is $5 billion. To calculate the country’s national income using the total output method, we need to add up the value added at each stage of production.

For example, to produce a car, we need to take into account the value of the raw materials, labor, and capital used in its production. Let’s assume that the value of raw materials used in the production of a car is $3 billion, the value of labor is $2 billion, and the value of capital is $1 billion. Therefore, the value added in the production of one car is $4 billion ($10 billion – $3 billion – $2 billion – $1 billion).

Using the same approach, we can calculate the value added for all computers and furniture produced in the country. Suppose the value added for all computers is $5 billion and the value added for all furniture is $3 billion. Therefore, the total value added for all three goods produced in the country is $12 billion ($4 billion + $5 billion + $3 billion).

To calculate the country’s national income using the total output method, we need to subtract indirect taxes and add subsidies. Let’s assume that the total amount of indirect taxes in the country is $2 billion, and the total amount of subsidies is $1 billion. Therefore, the national income of the country using the total output method is $11 billion ($12 billion – $2 billion + $1 billion).

In this case study, we have used the total output method to calculate the national income of a hypothetical country. The method helps to identify the value added at each stage of production, providing a comprehensive measure of economic activity. It is a useful tool for policymakers and economists to understand a country’s economic performance and plan for its future development.

Conclusion:

In conclusion, the total output method is a crucial tool for calculating national income and measuring a country’s economic activity. It takes into account the value added at each stage of production, providing a comprehensive measure of economic activity that helps to identify the contribution of different sectors to the economy. The method is a standard measure of economic activity and is essential for comparing the economic performance of different countries over time. The total output method is useful for policymakers and economists to plan for a country’s future development, formulate effective economic policies, and allocate resources effectively. Its ability to identify potential issues in the economy, plan and forecast economic activity, and help businesses make informed decisions makes it an indispensable tool for economic analysis.

Refrences:

https://www.worldometers.info/world-population/pakistan-population/

https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=PK