National Income Accounting

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National Income

• “National income accounting is a set of rules and definitions for measuring economic activity in the aggregate economy.” D.C. Colander
• It tries to summarise the performance of an economy by measuring national income aggregates in a year.

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Uses of National Income Accounting

• National income indicates the performance of the economy of a country.
• Govt. can identify economy’s strength and failures.
• Govt. can formulate new policy depend on the result.
• National income accounting helps to evaluate and review of policies under implementation.
• It reflect the specific contribution of individual sectors and their growth over time
• Accounting helps to reflect how national income is shared among various factors of production
• It helps in making comparison among nations in respect of national income and per capita income
• It is helpful to UNO which formulates welfare plans for different countries

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CSO – Central Statistics Office

• It is under the Ministry of Statistics and Programme Implementation
• CSO is responsible for co-ordination of statistical activities in India
• Most of the statistical data prepared by CSO like, GDP, National Income, Inflation etc.
• Established in 1951 in Delhi
• It has two publications
  1. The statistical abstract – In India (annual)
  2. The monthly abstract of Statistics

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Concepts in National Income and Output

Gross Domestic Product – GDP

• It refers to the money value of all finished goods & services produced within country for a given time period.
• GDP is a broad measurement of a nation’s overall economic activity
• Gross would mean we are considering the amount of goods without deducting depreciation
• GDP came into use in 1937 in a report to the U.S. Congress by economist Simon Kuznets in response to the Great Depression
• It includes the productions within
  • Political frontiers of country
  • Territorial waters of the country
  • Embassies, consulates and military establishments in abroad
  • Ships and aircraft operated by the residents of the country with other countries
  • Engaged in extraction in areas in which the country has exclusive rights of exploitation
• Base year for GDP in India is 2011-12.

Nominal GDP or GDP at Current Prices

• Nominal GDP is the present market value of goods and services produced in a country during a year.
• It will include all of the changes in market prices that have occurred during the current year due to inflation or deflation.
• It is also called as GDP as market price.

Real GDP or GDP at Constant Prices

• Real GDP is an inflation-adjusted measurement of value of all goods and services produced by an economy in a given year
• It is expressed in base-year prices.

GDP Deflator

• GDP deflator or implicit price deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year.
• GDP deflator = (Nominal GDP / Real GDP) X 100
• It is a measure of price inflation/deflation with respect to a specific base year
• The Gross Domestic Product deflator of the base year itself is equal to 100.
• GDP deflator is not based on a fixed basket of goods and services
• The “basket” for the GDP deflator is allowed to change from year to year with people’s consumption and investment patterns

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national income gdp full form gross product methods for measuring disposable

 Nominal GDP vs. Real GDP

• Nominal Gross Domestic Product is based on the monetary value of goods and services, it is subject to inflation.
• Real GDP is calculated using a GDP price deflator, which is the difference in prices between the current year and the base year.
• Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used.
• Overall, real GDP is a much better index for expressing long-term national economic performance.

GDP at Factor Cost

• If we deduct total indirect taxes and add total subsidies to GDP at market price we will get GDP at factor cost.
• GDP at factor cost = GDP at market price – Tax + Subsidies

national income gdp full form gross product methods for measuring disposable

Net Domestic Product – NDP

• NDP accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration.
• Net Domestic Product = GDP – Depreciation

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Gross National Product – GNP

• It is an estimate of total value of all the final output of products and services in a time period by a country’s residents.
• GNP = Consumption + Government Expenditures + Investments + Exports + Factor Income of Indians abroad – Factor Income of foreigners in India
• GNP = GDP + Net Factor Income from abroad
• Net Factor Income from abroad = Factor Income of Indians abroad – Factor Income of foreigners in India
• Gross National Product is citizen specific, not location specific
• GNP includes total money value of goods and services produced by Indians and Indian entities

GDP vs GNP

• GDP looks at the value of goods and services produced within a country’s borders, GNP is the market value of goods and services produced by all citizens of a country
• GDP is an indicator of the local/national economy, GNP represents how its nationals are contributing to the country’s economy.

Net National Product – NNP

• It refers to the total market value of all final goods and services produced by the factors of production by the citizen of a country during a given time period, minus depreciation.
• Net National Product can also be found out by adding the Net Factor Income from abroad to the NDP
• NNP at Market price = GNP – Depreciation
• NNP at Market price = Net domestic product + Net Factor Income from abroad

Net National Income or NNP at factor cost

• It can be defined as the net value added at factor cost (by the citizen) in an economy during an accounting year.
• It is the income earned by the factors of production by citizen of a country.
• NNP at factor cost or national income is defined as the sum of domestic factor incomes and Net Factor Income from abroad.
• If NNP figure is available at market prices indirect taxes must be subtracted and subsidies added to get NNP at factor cost or national income.
• NNP at Factor cost = Net National Income = NNP at market price – Tax + Subsidies

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National Disposable Income

• National Disposable Income = NNP at Market price + Current transfers from the rest of the world
• Current transfers = Net Remittance + Gifts + Aid etc.

Personal Income

• It is the sum of all incomes actually received by individuals of a country during a given year.
• In order to estimate it, from national income
• Personal Income = Net National Income – Sum of social security benefits – Corporate income – Corporate taxes – Undistributed corporate profits + Personal payments
• Personal payments are kind of payment not for any production, for other reasons
• Example of personal payments – Pension, Student scholarships

national income gdp full form gross product methods for measuring disposable

Personal Disposal Income

• It refers to the amount of money that households have available for spending and saving after income taxes.
• Personal disposable income equal to consumption plus saving
• Personal Disposal Income = Personal Income – Taxes = Consumption + Savings

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Purchasing Power Parity – PPP

• It is a theoretical exchange rate that allows you to buy the same amount of goods and services in every country.
• Purchasing power parity is a theoretical rate because no country actually uses it.
• But government agencies use it to compare the output of countries that use different exchange rates.
• The World Bank computes PPP for each country.
• It provides a map that shows the PPP ratio compared to the United States.

national income gdp full form gross product methods for measuring disposable

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Methods for Measuring National Income

• There are mainly 3 methods to measuring national income
  1. Product or Gross Value Added Method
  2. Income Method
  3. Expenditure Method

Value Added (GVA) or Product Method

• This is also called output method.
• In this method the value added by each firm in the production of goods and services is measured.
• Value added by a firm is measured by deducting expenditure incurred on intermediate goods such as raw materials, industrial product or services.
• From the value added by each firm we subtract consumption of fixed capital (depreciation) to obtain net value added at basic prices.
• GVA at Basic price = Value added of all sectors production – Intermediate consumption
• GDP at Market price = GVA at basic price + Product tax – Product subsidies
• GVA at basic prices will include production taxes and exclude production subsidies available on the commodity.
• GVA at Factor Cost = GVA at basic price – Production taxes + Production subsidies
• In this method, the economy is divided into different economic sectors such as agriculture, industry and service.
• We need to add all the sectors and sub-sectors value added to get GDP.
• Some other things should be in mind while using this method
  • Rent values of self-occupied houses should be included
  • Value of production for self-consumption should be counted. Ex – agricultural products
  • Brokerage or commission should be counted
  • Sale and purchase of second-hand goods should not be included
  • Value of services of housewives are not included

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Merits and Demerits of Value Added Method

• GVA gives a picture of the economic activities from the producers’ side or supply side
• A sector-wise output provided by the GVA, which help the policymakers to decide to formulate sectors-wise policy.
• Problem of double counting arises due to the fact that the industry’s output is often the input of another industry

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Income Method

• We add all the incomes from employment and ownership of assets before tax, received from all the production activities in an economy.
• This method approaches national income from distribution side.
• It also includes interest on capital, profits of entrepreneurs and trading surplus of the public sector corporations.
• In this method identify the productive firms and then classify them into various economic sectors.
• Factor payments are classified into the following groups
  1. Wages, salaries and social security schemes of employees
  2. Rent and royalty
  3. Interest
  4. Profits
     • Dividends
     • Undistributed profits
     • Corporate income tax
  5. Mixed income of the self-employed
• By summing up the incomes paid out by all sectors we can get domestic factor income
• It is also called net domestic product at factor cost.
• GDP at market price = Total Factor Cost + Tax – Subsidies
• Factor costs
  • Land – Rent
  • Labour – Wages
  • Capital – Interest
  • Entrepreneur – Profit
  • Total Factor Cost = Rent + Wages + Interest + Profit

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national income gdp full form gross product methods for measuring disposable

Expenditure Method

• This method measures the total domestic expenditure of the economy.
• Expenditure is two types consumption expenditure and investment expenditure.

• GDP at Market Price = Final Private Consumption  + Investment + Govt. purchase + Net Export (Export – Import)
• Real GDP = GDP at market price need to adjusted with base year
• Expenditure method gives a picture of the economic activities from the consumer side.

Final Private Consumption

• It is the money spend by consumer to buy consumption of goods and services
• Consumer spending is the biggest component of GDP
• Intermediate consumption is not counted
• New house or property purchased will be counted in investment (Not as Private Consumption)

Investment

• Investment is private domestic investment, or capital expenditures.
• Business investment increases productive capacity and boosts employment and GDP.
• Such as new house, Share, Bond, Debenture or any goods that will be used in future production will be counted

Government Purchase

• Government purchase is consumption expenditure and gross investment.
• Govt. spend money on equipment, infrastructure, and salary.
• Ex- FCI food grain purchase, LPG-DBT, pension, scholarship, road, railways construction etc.

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Net Export

• Net Export = Exports – Imports
• A current account surplus boosts a nation’s GDP, while a deficit is a drag on GDP.
• Export includes Indian and foreign companies operating in India

Residual Error

• All these methods of measuring national income are supposed to give the same final figure.
• Any mismatch among the three measures is due to statistical and calculation error.
• This is known as rounding-up error or residual error.

Major Difficulties in Measurement

• Non-availability and unre­liability of accurate data relating to the various sectors of the economy
• Double Counting problem in excluding raw materials and semi-finished goods from the estimates of national income
• Difficulties in making proper adjustment of the changes in the price-level or inflation
• Proper value of public goods like road, hospitals, defence, schools are unknown.
• Self-Supplied Goods and Services. Ex- owner-occupied houses, farmers produce food for themselves

National Income Doesn’t Cover

• Underground Economy
• Non-Marketed Activities (Mom cooking food for home)
• Barter Exchanges (Rice given for oranges)
• Informal sector income
• Negative Externality (3rd party effected by any productivity)
  • Ex- environmental problems
• Opportunity cost
• Income Inequality (Gini Coefficient)

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