In details, actual steps to be taken for estimating `net value added' have to differ from one specific productive activity to the other. For this purpose, therefore, the whole economy is divided into certain sets of categories of economic activities. For each set, total value of the output is taken and the value of inputs of raw materials and services is subtracted from it. This gives us the `value added' by the said set of activities without double counting. If the set of activities happens to be that of services, the value added is measured in terms of the total money paid in return for the services received minus the cost of inputs like expenditure on transport, advertisement, and other miscellaneous items.

For example, if we consider an individual firm engaged in production of, say steel, its net value added is the total value of its production minus the intermediate products used in the process of production.

National income

As seen above, activities of production lead to the payment of incomes to the suppliers of productive services (also called "productive resources" or "productive inputs"). The net value added available for each unit of production is equal to the amount of income generated by the unit in the process of production.

If we consider a given production firm, then the income generated by it is the total value of its produce minus the value of the inputs used. For this reason, the two terms `national product' and `national income' have the same meaning. This value added or income generated takes the form of (i) `wages and salaries' paid to the labour and (ii) the `operating surplus', which itself is a complex concept and is further shared by the suppliers of "non-labour" inputs.

The labour income generated takes the form of wages and salaries, including commission, bonus and pensionary benefits (note that these benefits are different from `old age pensions', which are a form of `charity' or `social security'). It may also take the form of payment in kind, such as housing accommodation.

For the economy as a whole, the operating surplus is defined as "gross output at producers' value less the sum of intermediate consumption, consumption of employees (including labour income of self-employed), consumption of fixed capital and indirect taxes reduced by subsidies."

It should be noted that this operating surplus is further distributed and received as income in various forms, such as profit, interest and rent, and so on, some portion of the operating surplus remains undistributed and may be used for further investment or building up of reserves. The distributed portion of operating surplus takes the form of dividends, interest and rent. In the Indian context, the concept of rent includes rent on land as also rent on buildings and other structures. In the case of self-employed persons, the income is a mixture of wages, interest, and profit, and so on.

Accordingly, the national income as expressed in the form of `factor incomes' consists of (i) wages and salaries, (ii) interest, (iii) rent, (iv) dividends, (v) undistributed profits, and (vi) mixed income of self-employed.

However, national income is not simply an aggregate of all incomes or receipts. It includes only those incomes which correspond to current production of goods and services and are referred to as factor incomes.

Various economic units in the country (both households and others) receive some incomes which do not correspond to the productive services rendered or valued added through a production process.

These are called transfer incomes and include old age pensions, unemployment allowances, education grants, gifts and charities, and so on. The transfer receipts are excluded from the calculations of national income.

(Edited extracts from the ICSI's Study Material on Basic Economics and Business Environment. www.icis-india.com.)

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