Criteria for Determining What to Include and What Not to in National Income
Economy can do without streetlights but not without industrial power supply. Power supply to industries is, thus, an intermediate product while streetlights are final products. A national income estimator has to include expenses on streetlights in national expenditure but has nothing to do with expenditures incurred on power supply to the industries.
Such expenditures are accounted for by the industrial units themselves in the form costs incurred on value addition. Thus, to determine whether a product is a part of the national product or whether expenditure is a part of the national expenditure or whether money value received is a part of the national income, one should ask oneself the following three questions:
(i) Has the product crossed the producers’ boundary? If the answer to this question is in affirmative, the product is a final product and must be included in the national product.
(ii) Is there a quid pro quo associated with the receipt of money value? If the answer to this question is in affirmative, the said receipt should be treated as a part of the national income.
(iii) How essential the product in question is for the economy? If the answer to this question is ‘very’, it is an intermediate product and expenses incurred on it are not to be taken into account by the national income estimator.