Ar

siiUni
ver
sit
yAgr
icul
tur
alandI
nvi
roment
alSi
nce

Depar
tmentofAgr
ooEconomi
cs

GROUP. Assi
gnment

sect
ion. 2

Name. I
Dno

1.Gedaa. Temam. UGR 11641/14

2 Arebu. Mudi . UGR 11259/14
3 mir Aliyi
. UGR. 13063/
14
4 Aleme. Demr ew. UGR 13300/ 14
5 Hannaa. Zepre. UGR. 11334/ 14

Def
ineNat
ionalI
ncomeAccount
ingpr
ocess
I
ntr
oduct
ion:

Nati
onalincomeisani mportantconceptofmacroecoomics.Iti
sthemeasureofeconomic
act
ivi
ti
esinacountry.I
tist
hemoneyval ueofal
lfi
nalgoodsandservi
cespr
oducedbyresi
dent
s
ofacountryinayear.I
tisal
sodef i
nedasthesum offact
orincomesinacount
ryinayear
.Iti
s
al
soexpressedi
ntermsofaggr egat
eexpendi
tur
eofacountryinayear
.

I
mpor
tanceofNat
ionalI
ncomeEst
imat
es:

I
ndi
cat
orofEconomi
cPr
ogr
ess;

Measur
eofEconomi
cGr
owt
h;

Compar
isonwi
thot
herCount
ri
es;
 Si
gni
fi
cancei
nBusi
nessPol
i
cyMaki
ng;

Si
gni
fi
cancef
orTr
adeUni
ons;

Knowl
edgeofSt
ruct
uralChanges;

Si
gni
fi
cat
ionf
orEconomi
cAnal
ysi
s,et
c.
Whatar
etheusesofnat
ionali
ncomeaccount
ing?
Therearemanyusesofnati
onalincomeaccounting,
andt hepri
maryusei stomonit
oreconomic
acti
vit
yandeconomicgrowth.Ot herusesincl
udehelpingoffi
cial
swi thpubli
cpol
icycreat
ion,
sett
ingtaxrat
es,compar
ingotherindustr
iesorsector
si neconomy ,andtracki
ngt
rendsinthe
economy .

Howdoyoucal
cul
atenat
ionali
ncome?
Nati
onali
ncomecanbecal culat
edanumberofmet hodsliket
heexpendit
ureapproach,i
ncome
appr
oach,andval
ue-addedapproach.Themostcommonwayt ocalcul
atethenat
ionali
ncomeis
usi
ngtheexpendi
tur
eapproachusinggrossdomest
icproductf
ormula.

Whi
chi
sanexampl
eofnat
ionali
ncomeaccount
ing?
Anationali
ncomeaccount
ingexampl
eistheGDPexpendi
tur
emodel .Thi
sisGDP=Consumer
spending+Busi
nessi
nvest
ment+GovernmentSpendi
ng+NetExpor
ts.

TheBasi
cModel
:TheCi
rcul
arFl
owDi
agr
am
Theeconomyconsi stsofmi l
l
ionsofpeopl eengagedi nmanyact iv
iti
es-buying,sel
li
ng,wor ki
ng,
hir
ing,manuf acturi
ng,andsoonTounder standhowt heeconomywor ks,wemustf i
ndsomeway
tosimplifyourt hi
nkingaboutalltheseact i
v it
iesI
notherwords, weneedamodelt hatexplai
ns,i
n
generalterms,howt heeconomyi sor ganizedandhowpar t
ici
pantsint heeconomyi nteractwit
h
one anot her
The ci r
cular
-f
low diagram of fers a si
mple wayofor ganizing allthe economi c
tr
ansactionst hatoccurbetweendi f
ferentsect orsintheeconomy m
Theci r
cular-
fl
owdi agram i
sav isualmodeloft heeconomyt hatshowshowmoneyf l
owst hr
ough
mar ket
samongt hesectorsoftheeconomy Accordingl
y,fr
om thepointofv i
ewoft henumberof
sectorsinvol
v edintheanalysi
sori nthemodel ,

Ther
ear
ethr
eemaj
ormacr
oeconomi
cmodel
s:
1.
Twosectormodel
2.
Threesectormodel(cl
osedEconomymodel
)
3.
Foursectormodel(OpenEconomymodel
)

Twosect
ormodel
Thismodelr epresentst hecasewher etherear eonl ytwosectorsintheeconomy .Thet wo
sectorsarehouseholdsectorandthefir
m sector.Thismodelisr
epresent
edbyt herelat
ionoruse
ofincomebyhousehol dsi.
e.consumersorhousehol dseit
herconsumeorsav et hei
ri ncome.
Thisrelat
ionisgivenbyt hefol
lowingequati
on: Y=C+S
Wher eY=i ncome C=Consumpt i
onexpenditure, S=Sav i
ng Si
ncesav i
ngi susedf or
i
nvestmentorsav ingisbyi t
sel
faf or
m ofinvestment ,S=I,t
heabov eequati
oncanber ewrit
ten
as: Y=C+IWher eI=invest
mentspendingThi smodel canbedemonstratedusi
ngci r
cularfl
ow
ofincomeandexpendi tureasfoll
ows(fi
gur
ebel ow)
Thr
eesect
ormodel
Thismodelincorpor
atesgov er
nmentsect or.Theref
ore,household,f
ir
msort hebusinesssector
andgov er
nmentarethethreeparti
esinvolvedintheeconomy Thismodelisal
soknownascl osed
economymodelbecausei tdoesnoti ncl
udeorconsi dertr
adewi thot
hercountri
es.Thismodelis
repr
esentedbyt hefol
lowingequation:Int
roducingthegov ernment:
Whyarewei ntr
oduci
ngthe
governmentinthemodel ?Pr
ovideregulati
onMaintai
nor der,peaceMakepoli
ciesTopreser
vethe
envi
ronmentforthepresentandfuturegenerati
ons
Thismodeli ncorporatesgovernmentsect or.Therefor
e,household,fi
rmsort hebusinesssector
andgov ernmentar et hethreepar t
iesinvol
vedi ntheeconomy .Thismodeli salsoknownas
closedeconomymodelbecausei tdoesnoti ncludeorconsidertradewithothercountri
es.This
modeli sr epresent edbyt hef ollowingequation:Y =C + S + G =>> Y =C + I+ G
Wher eG=Gov ernmentspending/expendi tur
e
Theci r
cularf l
owdi agram showst heincomereceivedandpay ment smadebyeachsect orofthe
economy Int hepr ev
ioussecti
onwehadhousehol dsandf i
rms,Wenowi nt
roducethegov ernment
i
nourci rcularf l
owdi agramWeal soopenoureconomy ,i.
e.i
ncludet r
ansacti
onswitht herestof
thewor l
d( i
.e.exportsandi mports).

Foursect
ormodel(
OpenEconomymodel
)Y≡C+I+G+(
X−M) ≡notexactequal
it
y;
i
denti
cal
l
yequalasamat terof def i
nit
ionWhere:
C=ConsumptionI= Inv
est
ment( pr
ivat
e)G=
Gover
nmentExpendi
tur
e/PurchasesX=ExportsM =Impor
tsY=Nominal
GDP
Nat
ionalI
ncomeAccount
ing
NationalIncomeAccount i
ngi saboutmeasur i
ngt hev alueofeconomi cactivi
tysuchasGr oss
Domest i
cPr oduct(
GDP)and/ orGr ossNat i
onalPr oduct(GNP) Note:alsothattherearet wo
majoract i
vi
tiesinthenationalincomeaccount ing processi mplied intheabov edefinit
ion:
Additionsanddeduct i
onsInotherwor ds,thepr ocessi nvolvesaddi t
ionsofal lt
hegoodsand
servicesproducedinapar ti
cularperiodi nthecount ryanddeduct ionsofal ll
ossesandcost s
i
ncur redandal l
paymentsmadebyt hecount rytotheext ernaleconomy .
NationalIncomeAccount i
ng’isthepr ocessoff indingoutt henetout putofacountrythrough
additionsofv al
ueaddedandpay ment sr ecei
vedaf terdeducti
onsofdepr eci
ati
onsandpay ments
tofor ei
gneconomyThi scanbecalculat edin

Whydowel
ear
nthe‘
Nat
ionalI
ncomeAccount
ing’
process?
Itgi
vesformalst
ructuref
ormacr oeconomictheorymodels.Itgi
vesaclearpictureofproduct
ion
sideandconsumpt i
onside( suppl
ysideanddemandsi deeconomi cper f
ormances)Ithel
psus
l
earnaboutwhatisconsti
tutedinnati
onaleconomyandtheirproperti
es/behavi
ors.
Thesinglemosti mportantmeasur eofov eral
leconomi cperformancei sgr ossdomest i
c
product(
GDP)Measur i
ngGDPi sanattempttosummar i
zeal l
economi cacti
vit
yov eraperi
odof

t
imeint
ermsofasingl
efi
gur
e/number
;iti
sameasur eoftheeconomy’
stotalout
putandtotal
i
ncomeI
notherwor
ds,GDPi
stheval
ueofallf
inalgoodsandser
vicespr
oducedintheeconomy
i
nagivenperi
odofti
me(nor
mal
l
ytheper
iodoft
imei
soney
ear
)GDPi
saf
lowv
ari
abl
ewher
eit
s
v
aluechangesf
rom t
imet
oti
me

RealGDPv ersusNomi nal GDP

Nomi nalGDPi st hev alueofal lfinalgoodsbasedont hepr i
cesexi stingdur ingt hetimeper i
odof
product i
onInot herwor ds,i tist hepr i
cewepayi nt hemar ketNomi nalGDPcangr ow i
nt hree
way sWhen out put r ises and pr i
ces r emai ns const ant Prices r i
ses and out put remai ns
unchangedWhenbot hpr icesandout putr ises
Thepr oblem,then,i show t oadj ustGDP sot hati tr ef l
ect sonlychangesi nout putandnot
changesi npr i
cesThi sadj ust menthel psusi ncompar ingt heGDPov ertimewhenpr icesar e
changi ngRealGDPi st hev alueofal lfinalgoodspr oduceddur i
ngagi vent i
meper iodbasedon
thepr i
cesexi stingi nasel ect edbasey ear Thev alueofnat ionalout putobt ai
nedbyt heuseof
suchbasey earpr iceisknownasReal Gr ossDomest icPr oduct( RGDP)
Real GDPi salsoknownasGDPi nconst antpr i
ceorBi rr
,ItisGDPadj ustedf orinflati
on
Notet hat t hebasey earmaychangef r
om t i
met ot i
me
Foreg.agi venbasey earpr icemaybeusedonl yf orf i
vey earsandt henanot hery earpri
cemay
beusedast hebasey earpr iceoft henextf i
v eormor eyear s
Nomi nalgr ossdomest icpr oduct( NGDP)i st her elativemagni tudeofcur r
entGDPmeasur edat
currentpr ices(cur renty ear)ofgoodandser vi
cesWecannot et hi
sthatonl ychangei npr
icelev el
canl eadt oachangei nNGNPev eni ft her eisnoact ual increasei nout putAsar esult,mostoft he
ti
me, NOMI NALGDP( NGDP)gr owsf astert hanr eal GDP( RGDP)mai nlyduet oi ncreasesinprices
ofgoodsandser v i
ces
Thissi mpl ymeanst hatt ogett hemostappr opriatemeasur eofnat ional economi cperfor
mances,
nomi nalGDP( NGDP)shoul dbeadj ust edt other ealGDP( RGDP) Thiscanbedonebydef l
ating
NGDPwhenpr i
cei srisingandbyi nflati
ngi twhenpr i
cei sf alli
ngTheadj ustmentf actori
sknown
asGDPdef l
atorGDPdef latori st her atioofnomi nal GDPt or eal GDP

GDPdef lat
or= ( NominalGDP/ RealGDP)
(
GDPdef lator)=(NGDP/ RGDP)
Rearrangi
ngtheequat ion,t
heval ueofGDPdefl
atorisobtai
nedbyt
hefol
l
owingrel
ati
on.
RGDP=( NGDP/ GDP.defl
ator)
Si
mi l
arly,
nomi nalGDPi scal
culatedbymult
ipl
yi
ngr ealGDPbytheGDPdefl
ator
.
NGDP=( RGDP)(GDPdef lator)

TheGDP def l
atorisani ndexmeasureofchangeinthegeneralpricelevel
.Itcanalsobe
calcul
atedfrom theout
putsandser
vicespr
oducedandt
hei
rrespect
ivebaseyearaswellasf
rom
thecurrentpri
cesasfol
lows.

(
Qc1Pc1)+Qc2Pc2)
+..
..
..
.
_
___
_____
_____
___
__
GDPdef
lat
orm= (
Qc1Pc1)+(
Qc2Pc2)+.
..
..
..

Where; QCi = curr

ent uni t of out put or ser vi
ce or i t
em
‘
i’
.( i=1,2, 3,………)
PCi = current pri
ce of out
put or servi
ce or ‘
’
it
em (i=1,2, 3,
………)
PBi=baseyearpr iceofout
putorser
viceor i
tm.
‘
i’
(i=1,2,3,………)
Here,thenumer atorrepr
esentst
hevalueofthecurrentyearoutput
s( goodsandser vi
ces)at
curr
entpricewher easthedenominat
orrepr
esentst
het otalval
ueofthecur r
entoutputatbase
yearpri
ce.

Notethatconsumerpri
cei ndexwehavebriefl
yexplai
nedintheprevi
oussect
ioni
scal
cul
atedi
n
thesamemannerasi stheGDPdef l
ator
.
Thatisthe‘
ConsumerPr i
ceIndex(
CPI)iscalcul
atedbytherel
ati
on
 CPI
=. (Qb1Pc1)
+(Qb2Pc2)
+..
..
..
..
..
..
..
.
_
____
____
____
____
__
(
Qb1Pb1)Qb2Pb2)
+..
..
..
..
..
..
..
..
.

Where; QBi = base year uni

t of consumpt
ion good or serv
ice or i
tem ‘
i
’.
(i
=1, 2,3,…)
PCi = cur rent pri
ce of consumpt i
on good or ser vi
ce or i tem ‘i
’.
(i
=1, 2,3,……)
PBi = base y ear price of consumpti
on good or ser vi
ce or i t
em ‘i
’.
(i
=1, 2,3,.
…)
Thediff
erencebet
weenthet
woar et
hat

GDPdeflatormeasur
esthepri
cesofal
lgoodsandser
vices(
incl
udi
ngexpendit
ureofbothfi
rms
andhouseholds)whereasCPImeasuresthepri
cesofallgoodsandser v
icespurchasedby
consumers.

GDPdefl
atori
ncl
udesonlyout
putspr
oduceddomest
ical
l
ywher
east
heCPIi
ncl
udespr
iceof
i
mpor
tedconsumergoodsaswel
l.

GDPANDGNP
Inthenat ionali ncomeaccount ingpr ocess,thet erms‘ Gr ossnat ionalproduct( GNP)andGr oss
Domest icPr oduct( GDP)ar eusual lyusedasanappr oximat eofeachot her
Butt herei sadi stincti
onbet weengr ossdomest i
cpr oduct( GDP)andgr ossnat ionalpr oduct
(GNP)
GDP i st hev alueoff i
nalgoodsand ser vicespr oduced bydomest icallyowned f actorsof
productionwi thinagi v
enper iod.
But,GNPr eferst othesum ofv aluesofgoodsandser vi
cespr oducedbyal lcit
izensofanat ion/a
countryallov erthewor ldinthecount r
ypl usout sidet hecount r
y .
Grossdomest icpr oduct( GDP)i sthesum ofv aluesofgoodsandser vi
cespr oducedi nt he
countrybyci tizensoft hecount ryandf or
eigners.Ther efore,GDPi ssomet hingr elatedt oterrit
ory
ofthecount r
y( i.
e.GDPi sterri
tor i
al)
whereasGNPi ssomet hi
ngr elatedt ociti
zenship( i.
e.GNPi snat i
onal).
Thedi f
ferencebet weenGNPandGDPequal st otheneti ncomeear nedbyf orei
gner s(NFP) .
Letust akeoneexampl e,MrXi saci ti
zenofEt hiopiaandhei swor ki
nginUSA.Nowt hequest ion
i
swhet hert oi ncl
udehi sincomeasapar tofEt hiopi annat ionalincomeornot .Si ncehei snot
uti
li
zingt her esour cesofEt hiopiat oearn,hisi ncomecannotbei ncl
udedi nEt hiopianGDPbut
howev eritwi l
l beincludedi nincomeofUSA.
WhenGDPexceedsGNP, resident sofagi vencount ryar eear ninglessabr oadt hanf orei
gner sare
earni
ngi nt hatcount r
y.
In Ethiopia,GDP has exceeded GNP si nce 1981 ( based on t he data av ailablei n Wor l
d
DevelopmentI ndicat orsCDROM,2000)butt hegapi swel lbelow1%( 0.75%t obeexact )during
1981t o1998Gr egor i
ancal endar .

Ther
elat
ionshi
pbet
weent
het
wov
aluesGDPandGNPi
sgi
venasf
oll
ows.

GNP–GDP=NFP, i
mplyi
ngthat
;
GNP=GDP+NFP,
Here,NFPist
henetfactorpaymentt
ociti
zensthisi
snothi
ngbutthedif
fer
encebetweenincome
r
eceivedbycit
izensofthecountryout
sidethecountryli
keMr.Xandt hei ncomerecei
vedby
f
oreigner
sint
hecountry
.Thus,GNPcanbegr eatert
hanorequal
toorlessthanGDPdepending

onthevalueofthenetfactorpayment
.
I
fthevalueofthenetfactorpayment(NFP)i
szero,i
tmeansbot
hGDPandGNPareequal
.
I
fthevalueofnetf act
orpay ment(NFP)isposi
ti
ve,thenGNPi
sgreat
ert
hanGDP.Thi
smeans,
t
heoutputpr
oducedbyci
ti
zensoft
hecount
ryi
slar
gert
hanwhati
spr
oducedi
nthet
err
it
oryof
t
hecount

Ot
herNat
ionalAccount
sMeasur
es
GrossDomest i
cPr oduct(GDP)andNetDomest icPr oduct( NDP) :
Capitalusedi npr oductionpr ocesswear sout ,ordepr eciateswhi l
ei tisbei ngusedt oproduce
output.
NetDomest icPr oduct(NDP)t akesdepr eciati
oni ntoaccounti nmeasur i
ngt henat i
onali
ncome.
Itist he di fference between Gr oss Domest i
c Pr oduct( GDP)and t he capitalconsumpt ion
all
owancewhi chi sameasur eofdepr eci at
ionofcapi tal goodsusedi nthepr oducti
on(D)
NDP=GDP–( Depreciati
on).
NDP=GDP–D
Exampl e,ifthet otaloutputofacount ry(GDP)i nagi veny earis100mi l
lionUSdol l
arandthel ost
partofcapi talgoodsi ngener atingt hisnat ionalout puti s9.5mi ll
ionUSdol lar,t
henthenet
domest icproduct( NDP)oft hecount ryinthatpar ti
culary earisgivenasf ol
lows;
NDP=GDP–D
=100mi lli
onUSD–9. 5mi l
li
onUSD =90. 5mi l
lionUSD
NetNat ional product( NNP)orNetDomest i
cpr oduct( NDP) :
Thesev aluesar eusuallyusedi nterchangeabl yb/ ct herei snosi gnif
icantd/ ceb/nthetwov al
ues
Theonl yd/ ceb/ nt hetwoi st hat( NDP)i scal culatedf r
om ( GDP)wher east heNetNat ional
Product( NNP)i scalculatedfrom theGr ossNat i
onal Pr oduct(GNP)
Thedi f
ferencebet weenGDPandGNPi sequal toort hesameast hedifferencebetweenNDPand
NNP.
NDP=GDP–D NNP=GNP–D
Thisimpl iest hatt hedi ff
erencebet weent hel efthandsi dei.e.NDPandNNPi sequalt ot he
dif
ferencebet weent her i
ghthandsi det ermsoft heequat ions
NDP–NNP=( GDP–D)–( GNP–D) =GDP–D–GNP+D =GDP–GNP So
(NDP–NNP)=( GDP–GNP)

Nat
ionali
ncome(
NIorY):
i
srepr esentedbyNIorYbydi f
fer
entschol
arsori
ndifferenttexts
NotethatGDPi sal
sorepresentedby‘Y’i
nmostofthecases
NI i st hed/ ceb/nt henetnat i
onalproduct(
NNP)ort henetdomest i
cproduct(
NDP)and
I
ndirectTaxes( I
T).
Theset axesaredeductedfrom NNPorNDPbef oremaki ngf act
orpay ment
s.
NIorY=NNP–I T or NI=NDP–I T, Wher e,I
Tr epresentsindi
rectt
axes

Nati
onali
ncomei snothi
ngbutt hepay mentstothef
actorsofproducti
on
Notethatabout75% off actorpayment sgot olabour. Thi sisb/clabouristhel
argest
componentoffactor
sofproduct i
onthroughouttheworl
d
Eg,f
rom theabov eexample( onNDP) ,ifthesum ofindirectt
axesintheperi
odamount
st o8
mil
li
onUSD,t hev al
ueoft heNat ionalIncome( NI
)isgiv enasf ol
l
ows: NI=NDP– IT
=90.5mil
li
onUSD–8mi l
li
onUSD =82.5mill
ionUSD

Per
sonali
ncome(
PI)
:
Thev alueofPIi
st henetvalueofnati
onali
ncomeanddiff
erentper
sonalpaymentsandrecei
pts
I
tisgi venbyt
hefollowi
ngrelat
ion:
PI=NI– { (
Socialsecur
itypayments+cor por
atei
ncomet axes+r et
ainedearnings+other
rel
atedpay ment
)} +{(t
ransf
erpayment
srecei
ved+subsidies+netinteresti
ncome+
Retained earni
ngs)}

Soci
alsecur
it
ypayment
s:aretheamountcol
l
ect
edf
rom i
ndi
vi
dual
stohel
pthepoor
,
t
hedi
sabl
edandt
heseni
orci
ti
zensoft
hecount
ry
Cor
por
atei
ncomet
ax:i
sthe t
ax col
l
ect
ed f
rom pr
ofi
torr evenue ofcor porate
organi
zati
ons( fr
om t heorgani
zat
ionnotf r
om indi
vidual
s)byt hegovernment
Retai
nedear nings:ar epartofincomegener at
edbycor porateorgani
zati
onsandkepti nt he
organi
zati
onf orgener at
ionofmoreprofitorforstr
engtheningthecapacit
yoftheor gani
zati
onor
company
Thispartoft hecor por
ateorganizat
ions’revenueorpr ofitthatisnotdisbursed/pai
doutt o
member sforper sonaluses

Tr
ansf
erpayment
s:aretheamountofmoneypeopl
erecei
vef
rom t
hei
rrel
ati
vesor
fr
iendsforfr
ee.
Foreg.theamountofmoneyy
ougi
vef
ory
ourmot
her
,fat
her
,br
other
,si
sterorf
ri
endwi
thout
expectat
ionofr
epay
ment
Subsi
dies:aretheamountofmoneyortheequi
val
entamountofot
hergoodsandser
vices
givenbyt hegov ernmentt oindi viduals,compani esororgani
zati
onstohelpthem
I
nt erestI ncome: i
samountofi ncomer eceivedonthesavedamountofmoneyi nbanks
Disposabl eincome( Yd) :
i
st heamountofi ncomet hatisl ef tf
oraper son af t
er pay mentofanytaxesandtransf
ers
Itist heamountt hatt heper soni sfreet ospendonwhat everhe/sheli
kesortosave
I
ti sgi venbyt hef ollowi ngident it
y
Yd=PI–( directorper sonal incomet axes).
Howev er,somet imesal lt
ransf ersandt axesar econsi
deredatthesamet i
me
I
nt hatcase,t hedi sposabl ei ncomei sdirectlycal
cul
atedfrom nati
onali
ncomewhi chisusuall
y
repr esent edby( Y).Thus, thedi sposabl eincomei dent
it
yisgivenasfoll
ows.
Yd=Y+Tr ansf ers–Taxes
Yd = Y+TR–T

Per
sonalsavi
ngs(
S)
Personalsav i
ngi stheamountofdi sposableincomet hati
sleftoverandabov econsumpti
on
expenditure.
i
st hed/ ceb/ ndi sposableincome( Yd)andconsumpt i
onexpenditur
e( C)anditisgivenas
fol
lows:
S=Yd–C
wher e‘
C’i
sconsumpt ionexpendi
tur
e
S i sper sonalsaving
Ydisdi sposableincome
Exampl e,from theabov eexampl
eofdi sposabl
eincome, wecancalcul
atetheval
ueofpersonal
saving(S)asf oll
owsi frel
atedper
sonalconsumpt i
onexpendit
ure(C)is65bil
li
onUSD.
S=Yd–C =$95bi l
li
on–$65bi l
li
on =$30bi l
l
ion

Appr
oachest
o‘Nat
ionalI
ncomeAccount
ing’
process
Alt
ernati
veApproachestomeasuri
ngtheGNPorGDP
Iti
sthroughmeasur eofGDPorGNPofacount rythateconomi
stscanidenti
fyorknowwhet
hera
countr
y’seconomyi sgr
owingornot
Therearediff
erentappr
oachestothenat
ionali
ncomeaccounti
ngpr ocess,
whichisthemeasur
e
ofGDP
Ther
ear
ethr
eemaj
orappr
oaches/
met
hodsofmeasur
ingGDP or
GNP.
1 Theval
ueaddedappr
oach;
2 Theexpendi
tur
eappr
oach;
and
3Thei
ncomeappr
oach.
Inalltheseappr oaches,weuset heideaoff undament
alnationali
ncomeaccountingident
ify
givenby :
Y=C+I+G+NX
Wher e:
C=nat i
onal consumptionexpendit
ure
I= nat ional
Investmentexpenditure.
G=gov ernmentexpenditur
e(f
or i
nfr
ast
ruct
ure, defense, et c)
NX=Netexpor t,thenetoftotalexportandtot
al i
mport =Export(
X)
–Impor t(M)
(f
oropeneconomy )

Val
ueaddedappr
oach(
VAA)
Accor
dingt
ot heVAAtonati
onalincomeaccount
ingpr
ocess,
thet
otalout
putofacount
ry,
Gross
domesti
cProduct(
GDP)isobtai
nedby :

addi
ngthenewv
aluesofgoodsandser
vicescr
eat
edatdi
ff
erentst
agesofpr
ocessori
ndi
ff
erent
sect
ors.

Onlyt
hevalueaddedateachst
ageofprocessindi
ff
erentsect
or sisr
ecorded.
ForEg,takeone‘ qui
ntal
’ofwheat,costi
ng200Bi r
rint hef arm.Inthepr ocessofmaki
ng
sandwi
chfrom t
hewheatcereal
s,t
hefoll
owingshoul
dber ecor
dedateachst age.

Expendi
tur
eappr
oach
,t
het ot
aloutputofacount r
y,grossdomest i
cpr oduct(GDP)ismeasuredas
thesum ofexpenditur
esmadei nallsectorsoft hecountr
y.
Allexpendit
uresoft hevari
oussect orsoft heeconomyar eaddedt oknow GDPTheunderlyi
ng
assumpt i
onofusi ngexpendit
urei nmeasur i
ngi ncomeist hatt
heexpenditureofonesect
oror
personistheincomeoft heother(receiversofthatmoneyspentbyot hersectors)
.
Thus,thenationali
ncomeidentityisgivenasf ollows

Thus,
thenat
ionali
ncomei
dent
it
yisgi
venasf
oll
ows:
GDP=Y=C+I+G+X–M
GDP=Y=C+I+G+NX
Where;GDP=Y=Gr ossdomest icincome/product
C=Per sonalconsumptionexpendi t
ures
I=Grosspr i
vatedomesticinvestmentexpenditur
es
G=Gov er
nmentexpendi t
ure(ondef ense,i
nfr
astr
uct
ures,
etc.
)
NX=netexpor t(export(
X)mi nusimpor t(M))
NX=X–M

I
ncomeAppr
oach Whenweuset heincomeappr oacht omeasureGDPorGNP,
weaddupal ltheincomesear nedbydi f
ferentfactor
sofpr oducti
on:l
and,l
abour,capi
talandso
on.
Thus, t he nat ional i ncome i denti
ty i s gi ven by t he f ol
lowing r el
ati
on.
GDP=Y=W +R+I+Π+I T–D,
wher e, GNP=Y=Gr ossnati
onal product
W =Wagesofal l
wor ker
s( compensat i
onsofempl oyees)
R=Rent spaidtopr oper
tyowner s(
rewardf orservi
ces)
I=Interestonbor r
owedcapi tal
s
Π=Pr ofi
tofbusinessor ganizati
ons
IT=I ndi
rectbusinesst axes
D=Depr
eci
ati
on(
Capi
tal
consumpt
ional
l
owance)