Production of goods and services gives rise to income; income gives rise to the demand for goods and services; demand gives rise to expenditure, and expenditure gives rise to further production. Thus, there is a circular flow of production, income, and expenditure. Based on these three related flows, national income can be measured by using three methods: product method, income method, and expenditure method, which are explained below:

The product method measures national income at the phase of production in a circular flow. In this method, the national income is measured from the output of the economy in a given period. All the goods and services produced during a year in the economy are measured at the market price.

In this method, the economy is divided into three sectors: primary sector (agriculture, forestry, fishing, mining, etc.), secondary sector (manufacturing, construction, electricity, gas, water supply, etc.), and tertiary or service sector (banking, transport, insurance, communication, trade, and commerce, etc.). The monetary value of the total production of every sector is calculated and summed up to find out GDP at MP. The GDP at MP so derived can be changed into GNP at MP by adding net factor income from abroad.

This method is common in many countries but there is more possibility of double counting. Double counting means certain items are counted more than once while calculating national income. It leads to an overestimation of NI. To avoid the problem of double counting, the following two methods are used:

In the final product method, national income is estimated by finding the market value of all final goods and services _produced in an economy in a year. The various steps to the estimation or calculation of national income according to this method are as follows:

While calculating NI through the final product method, the problem of double counting occurs. In order to avoid double-counting, only final products should be included and the value of intermediate products should be excluded. But it is very difficult to avoid double-counting because the same product is used as the intermediate good by firms and the final good by households. For example, flour is used as the intermediate good by biscuit industries whereas it is used as a final product by households for making bread. Another way to avoid the problem of double counting is a value-added method which is explained below.

In the value-added method, the value-added or created at different stages of production is counted for estimating national income. Thus, according to this method, national income is the sum of the total value added by different producing units of a country in their production process. Value-added means the addition to the value of raw materials and other inputs during the process of production. Value-added, in fact, refers to the productive contribution of an enterprise. In order to calculate the value-added at a particular stage of production, the cost of an intermediate product is deducted from the total value of output. Thus,

Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. In calculating GDP, we sum up the value added at each stage of production.

Alternative method,