Gross Domestic Product etc - 27

Methods of estimating income

3.7 There are three methods used in the measurement of income. The first
known as production (or value added) method based on the value that has
been added in the process of production. The second known as income
method also arises from the first in that the production process generates
income, which is paid to the factors of production. Again, the production
within the economy for a given period of time is meant either for the
consumption within the economy or for the addition to the existing stock of
goods or for exports to the rest of the world. This provides us with a third
method of measurement of income known as expenditure method. Thus the
three methods of estimation of income are circular in nature in the sense that
it begins at the production process where the productive units engage
labourers and capital and produce goods and services, the total measure of
which gives the state product. This production process generates a given
amount of money income, which is distributed by the productive units to the
factors of production, or in other words, the state income by factor shares.
The income thus received by the factors of production is then spent either by
the labour in their capacity as households in terms of acquisition and
consumption of goods and services, or by the producers in acquiring more
capital and increasing the physical assets of their productive units. The
income by definition is same whether measured at the point of production or
at the point of income generation or at the point of final utilisation. The
income can thus be measured through any one of the alternative methods but
if a complete analysis of the economy is the objective, then it should be
measured by all the three different methods simultaneously and compared.
[Reproduced from CSO Publication]