BASIC CONCEPTS IN NATIONAL INCOME ACCOUNTING

Introduction to National Income Accounting:

National Income Accounting is a method used to measure the economic performance of a

country. It provides a framework for analyzing and assessing the overall health of an economy
by tracking various economic activities and transactions.

1. Gross Domestic Product (GDP):

GDP represents the total monetary value of all final goods and services produced within a
country's borders over a specific period (usually annually or quarterly). It can be measured in
three ways: production approach, income approach, and expenditure approach. GDP serves as a
key indicator of a country's economic output and growth.

Components of GDP:

C+I+G+X-M

Consumption (C): Spending by households on goods and services.

Investment (I): Spending by businesses on capital goods and changes in inventories.

Government spending (G): Expenditure by the government on goods and services.

Net exports (NX): Exports minus imports.

Real vs. Nominal GDP:

Nominal GDP is measured using current market prices, while real GDP adjusts for inflation or
deflation by using constant prices from a base year.

Real GDP provides a more accurate measure of economic growth as it accounts for changes in
the price level.

Real GDP = Nominal GDP X 100

GDP Price index

2. Gross National Product (GNP):

GNP measures the total monetary value of all final goods and services produced by the citizens
of a country (whether at home or living abroad) within a specific period. It includes the income
earned by citizens and businesses of a country regardless of their location and it excludes income
earned by foreigners in one’s country.

GNP = GDP + Net income from abroad (NIFA)

NIFA = Income earned by citizens abroad – income earned by foreigners in home country

NIFA can sometimes be referred to as Net Foreign Investment, Net Property Income from
Abroad or Net Factor Income from Abroad.

3. Net Domestic Product (NDP):

This is defined as the difference between Gross Domestic Product and depreciation.

NDP = GDP - Depreciation

4. Net National Product (NNP):

NNP is derived by subtracting depreciation/Capital Consumption Allowance (or the loss of value
of capital goods) from GNP. It reflects the net income earned by residents of a country after
accounting for the wear and tear on the capital stock.

NNP = GNP - Depreciation

5. National Income (NI):

National Income is the total income earned by a country's residents from the production of goods
and services within a specific period. It includes wages, salaries, profits, rents, and taxes minus
subsidies.

NI = NNP – Net Indirect Business Tax

Net Indirect Business Tax = Indirect Business Tax – Government Subsidies

6. Personal Income (PI):

This is the measure of the amount of income that individuals actually received in an economy
during an accounting period. It is obtained by deducting from national income, all incomes
earned by persons but not received and adding to national income, all incomes received but not
earned. It should however be noted that not all money earned are received due to payment for
National Social Insurance Security Trust Fund (NSTSTF), company taxes (Tc), National
Housing Fund (NHF), undistributed profits (Up), etc

PI = NI – SIC – Tc – Up + Tp

7. Personal Disposable Income:

Disposable Income is the amount of income available to households after taxes have been paid
and government transfers received. It represents the income that households can spend or save as
they choose.

PDI = PI – Personal Taxes

8. Per Capita Income:

This is also known as income per head. It is one of the major parameters for measuring
development between or among countries. It is calculated as GNP divided by population.

Thus PCI = GNP

Population
PCI is used as a yard stick for measuring the standard of living of a country

METHODS OF MEASURING NATIONAL INCOME

There are three ways of estimating National Income:
I. The Output or Product Method
II. The Income Method
III. The Expenditure Method

Output Method:
This method focuses on the value of goods and services produced and is often used as the
primary indicator of a country's economic performance. In this method, due cognizance is taken
of the concept of value added in order to avoid double counting. To avoid double counting, two
ways can be used in calculating the total value of finished goods and services in the economy:
a. We can utilize the Value Added principle. In this principle, the final value of the
commodity is equal to the sum of the value added to the commodity at each stage of
production. Using this approach, the GNP is the sum of the Value Added by each
productive enterprise or economic agent at each stage of production
b. Counting the value of the final products ONLY
 Income Method:
This method calculates national income by summing up all incomes earned by individuals and
businesses within a country over a specific time period. It includes wages and salaries, rental
income, interest income, and profits earned by businesses. The total income earned by all factors
of production (labor, capital, and land) is added together. This method provides insights into how
income is distributed among different factors of production and social groups. Sin using the
income approach, care must be taken to include ONLY the earnings which are attributed to the
performance of current economic activity. Thus, transfer payments such as gifts to old people
and beggars, grants, subsidies and unemployment compensation are excluded. Similarly, interest
on national debt, social security payments are excluded. In addition, earnings from illegal
activities such as smuggling, stealing and prostitution are excluded partly because these are not
socially useful activities and partly because it is impossible to get accurate earnings data on
them.

Expenditure Method:
This method calculates national income by summing up all expenditures on final goods and
services within a country over a specific time period. It includes consumption expenditure by
households, investment expenditure by businesses, government expenditure on goods and
services, and net exports (exports minus imports). That is,
Y = C + I + G + (X – M)
This method provides insights into the patterns of spending within the economy and the sources
of aggregate demand. In using the expenditure approach in order to avoid double counting,
ONLY the expenditures on final products are recorded.

These methods are often used in conjunction to provide a comprehensive understanding of a

country's economic activity and performance. While each method has its strengths and
limitations, together they offer valuable insights into the complexities of national income
accounting.

Importance of National Income Accounting:

 Provides policymakers with data to formulate economic policies and make informed
decisions.
 Helps in comparing the economic performance of different countries.
 Facilitates the analysis of income distribution and inequalities within a country.
 To know a country’s economic progress over time
 To know the standard of living of the population
  To know the structure of production
 To aid allocation of resources in the economy
 To aid redistribution of income
 To aid foreign investment
 It indicates the extent to which the economy can generate resources internally and what
policy measures should be used to mobilize savings

Limitations of National Income Accounting:

 Excludes non-market transactions such as household production and volunteer work.

 Does not account for the underground economy or informal sector.
 Ignores environmental degradation and depletion of natural resources.
 Problem of double counting
 It is sometimes difficult to draw a line, between payment for a productive service and a
transfer payment. For example, the earnings of beggars would normally be treated as
transfer payment but there’s an element of a productive service in what they do because
they may offer a prayer for the person who gives them money or may even clean his car.
 There’s a major problem of estimating depreciation/capital consumption at the national
level
 Many underdeveloped countries do not have reliable and up-to-date statistical data.
 Problem of inflation
 Inadequate technical expertise
 Timing of computation

Conclusion:

National Income Accounting is a vital tool for understanding and evaluating the economic
performance of a country. By tracking the production, income, and expenditure within an
economy, policymakers can make informed decisions to promote economic growth, stability, and
welfare. However, it is essential to recognize the limitations and complexities inherent in
measuring national income accurately.