Economics

National Income Accounting

Aditya Kalia
 National Income Accounting

Brief summary of concepts to be studied

• General Model of an economy com
• Related concepts: ail.
gm
• Factors of Production 33
@
• 2
arStocks
3 & Flow variables (Income v/s Wealth)
• Simple One person economy ek
h
nk
s h • Types of Goods:
• Real world economy with specialized roles
sh
a
sh
a • Intermediate
• Concept of Dynamic Equilibrium ly for • Final:
On
• Leakages – Taxes, Savings, Imports • Capital
• Injections – Govt. Expenditure, Investments, Exports • Consumer – Durable & Non-Durable

• Calculation of Output of Economy: • NDP: Depreciation and Consumption of Final Goods

• Income Method • Other measures of Income:

• Expenditure Method • National Income
• Production or Product Method • Personal Income
• Common metrics of measurement of output: • Factor Income

• GDP • Purchasing Power Parity (PPP)

• GNP – Net Factor Income from abroad
 General Economic Model
In order to produce, we need: • In a very simple economy-
• Someone willing to
assemble requirements
needed to produce a good
and take necessary risk of
failure in case either the
process fails or good does
not sell – Entrepreneur
• Money to buy items &
machinery necessary to
produce the good – Capital
• A designated place where
production process can be
carried out – Land
• People carrying out the
production process –
Labour.
• The role of this person can be broken
down into two types:
m
• Where a person produces for ail.
co
• A firm producing goods being
his own consumption, gm
3 3 @ demanded by utilizing factors of
• Where there is no ar32 production
kh
dependence on anyone
e
kshelse • A household consuming goods
n
for any requirement,
sh
a
produced by spending their incomes.
ha
for
s
• The firm earns revenue by selling
• All these Ofactors
n lwill be
y
goods
provided by the same person
• The firm spends money on buying
• Also, the benefits will also be factors of production.
enjoyed by the same person: • The household earns incomes by
providing factors of production to
• Will provide Land, labour,
capital, ent. for production
the firm.
• The household spends money on
• Will consume the product buying goods from the firm.
produced out his efforts.
• This complementary demand and
supply of goods and factors of
production is the economic machine
powering the economy.
 Diagrammatic representation of Circular Flow
Model
Simple Model Specialised, Real world Model
com
ail.
gm
3 @
3
ar32
e kh
ksh
an
a sh
sh
for
Only
 Calculating the Output
com
ail.
• Dynamic Equilibrium r32
3 3 @
gm

a
kh
• Leakages and Injections –
e
ksh
an
a sh
sh
or
• Savings, Taxes, Imports v/s Investments,
nly
O
f
Government spending, Exports
• The Growth of an economy
 Approaches to measurement
com
ail.
• Expenditure Method r32
3 3 @
gm

a
kh
• Income Method
e
ksh
an
a sh
sh
or
• Production Method
f
Only
 Income Approach Expenditure Approach

com
ail.
• Sum of Total incomes • Sum
23
3 of
@
gm Total expenditures done

by
ar3 households or received by
received/earned due to factors ksh
ek
h
firms –
an
sh
of Factors of Production- for
sh
a
• Households – Consumption
nly
• Land – Rent
O
expenditure
• Businesses – Investment
• Labour – Wages Expenditure
• Capital – Interest • Government – Government
Expenditure
• Entrepreneurship - Profit • Net Foreign Expenses – Total
exports less total imports
 Production Method
com
ail.
Difference in Intermediate and Final Goods. @
gm
3 3
r3 2
Value Added (VAi) = Value of Output produced – Value of intermediate goods
e k ha
ksh
NVAi = GVAi – Di a sh
an
r sh
GDP = Σ GVA i = Value of Final Goods & services produced
n ly fin an economy in a given time
o
period, usually a year. O

Value→ Measure economic value

Final→ Only final G&S value is counted, not intermediate
Produced → All production (*and not sale)
IN an economy→ Inside the geographical boundary of an economy – wherever the territory of a country/region extends, all
production in those places, IRRESPECTIVE WHO is producing it.
Time Period → Measurement is done in a fixed time period. It is a flow variable, not a stock variable.
 Related Concepts
Firm’s Expenditure: Investment – Concept of Capital Goods.
m
co
Components of Investment: @
gm
a i l .
3
23
- Fixed Investment – Investment in machinery, etc. hekha r 3

ks
an
- Residential investment – investment in houser shbuilding
as
h
o
ly f
- Change in inventory – accumulation of unsold
O n
goods (intentional or unintentional)

Total Output = Amount Produced → Sold + Unsold→ Planned/Unplanned

Δ Inventory (=Unsold output) = Production in the year – Sale in the year
GVAi = VAi – Zi
GVAi = Vi(value of Sales) + Ai(value of change in inventories) – Zi
 Related Concepts

Depreciation: Loss of value of capital goods purchased- om

c
mail.
Machinery gets depleted, needs expenses for maintenance.
r32
3 3@
g

a
ekh
ksh
This loss of value is called depreciation. The value a sh
an lost in one year on existing
sh
investment is subtracted from new investmentOn
ly f or
to arrive at net investment in a year.
Gross investment = Total investment done in a year.
Net investment = Gross Investment – Value lost due to wear and tear of existing
stock of capital goods
= Gross Investment - Depreciation
 Related Concepts

Different Points of measurement- Concepts of: m

i l . co
a
• Factor Cost 23
3 @
gm

a r 3
• Basic Price an
ks h e kh
h
as
• Indirect Taxes & Subsidies – product t&s v/sn ly f
o r sh
production t&s
O
• Market Price
• Constant Price
• Base Year Price – Choice of Base Year? – GDP deflator
Macroeconomic inference from Methods of
measurement
com
ail.
gm
Disposal of 3 Income=
3 @ Consumption + Savings + Taxes
a r32
h
h ek
s
nk
sha
sha
for
Only

- Importance of Savings and Investments rates

- Concept of ICOR

GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices
GDP at market prices = GVA at basic prices + Product taxes- Product subsidies
 Concept of National Income
com
ail.
• Income v/s Production → GNP v/s GNI 3 3 @
gm
r32
• World Bank Definition- GNI (formerly GNP) is the sum of valueshadded
ek
a
h by all resident producers plus any product taxes
(less subsidies) not included in the valuation of output plus net receipts of nkprimary income (compensation of employees and
ha
property income) from abroad. Data are in current U.S. dollars. sh
a s
for
• Indian definition – NI = NNP(FC) = NNP(MP)
O nly
– Indirect taxes + Subsidies
• Other measures-
• Personal Income = Income of households = NI – (incomes earned/retained by
Businesses and Government)
PI = NI – (UP + Net interest payments BY households + Corporate Taxes) + Transfer payments to
households from Govt and businesses
PDI = PI – Personal Taxes
National Income (contd.)
com
ail.
National Disposable Incomegm
3@ = NNP (MP) + Other Current transfers
r323
ha
ek
sh
*Concept of Currentan
k Transfers
a sh
h
fors
ly
On
Private Income = Total money accruing to
the private sector for spending

= Factor Incomes from NDP to private

sector + National Debt interest + NFIA +
Current transfers from govt. + Other net
transfers from RoW
 GDP Measurement in India
1st- Define what is →Identify what is being
production and what is
produced.
not.
→Identify a sample space
2nd – Measure the representative of thely f
o r
On
quantity and value of economy.
what is produced →Measure their output
3rd – Sum up all what is through surveys – NSSO
measured collects information.
4th- From what is →Now, entities submit their
production data themselves
measured, estimate what at the MCA21 database.
has not been measured
com
ail.
→ CSO
3 3
gm
@ under the guidance of NSC combines the
r32data gathered from surveys.
kh
a
e
n ksh → From the gathered data, it extrapolates
s h as
ha
production level for those that cannot be and
has not been measured.
→ Data is extrapolated and combined using
assumptions. Assumptions are rationally
justified and follow standards laid down by
IMF’s National System of Accounts.
→ In the next survey, the sample may change,
data sets may change. Hence, need to ensure
comparability across years. Again, assumptions
are made while backtracking the data for other
years.
 GDP and Welfare – Limitations of GDP
com
ail.
- Increase through taxes, reduction of subsidies and inflation
23
3 @
gm

h ar3
ek
- Distribution of output/income – no measure hof
a n kshinequality
s
sha
- Non-monetary exchanges On
ly for

- Indifference to externalities
- Existence of informal sector – disproportionately large in emerging economies
- Black market
- Discrepancy in data and methodologies
 Alternatives to GDP – Growth v/s
Development
com
ail.
• Per Capita Income – GDP Per capita r32
3 3 @
gm

h a
ek
• Measurement at PPP (Purchasing PowerhaParity)
sh
an
k s h

s
for
Only
 Some Development Indices
com
ail.
• HDI, GDI, IHDI
r32
3 3 @
gm

a
kh
•
e
sh
GII a sh
an
k
sh
or
•
f
Green GDP Only

• GNH
• Poverty metrics, etc.
• Sustainable Development, Inclusive Growth, Five year plans, SDGs