NATIONAL INCOME

ACCOUNTING
Trends in India’s GDP
Methods:
 Income approach
 Expenditure approach
 Final Output approach

By the circular flow we know all

approaches will give same result
The Income Approach
 The income approach is shown on one
half of the circular flow.
 Firms make factor payments to
households for supplying their services
as factors of production.
 Households spend the income they earn
on goods and services
Output Method;
 Adds up the market values of all goods
and services produced .
 It ignores intermediate goods and
second hand sales of goods
 This avoids double counting
Expenditure Method:
 Consumption
 Investment
 Government purchases
 Net exports: exports less imports
 Consumption involves spending on
services, durable goods and non
durable goods
Expenditure method:
 Investment is gross private domestic
expenditure on new capital goods ,
depreciation and inventories.
 Investment excludes :
household purchases of durable goods
purchase of existing buildings and
machines
purchase of stock and financial assets.
Expenditure method:
 Government expenditure includes
spending on goods and services but
excludes transfer payments.
 Net exports = exports less imports
 GDP = C+I+G+X-M
 C+S+NET TAXES=C+I+G+X-M
 S+M+T=I+G+X
 LEAKAGES = INJECTIONS
Equality of Income and
Expenditure
 GDP is calculated either by adding up all
values of final output or by adding up
the values of all earnings or income.
 GDP at market prices equals the sum of
market values of all goods produced in
the economy
Gross vs Net:
 Depreciation or capital consumption is
the amount by which an assets value
falls in a given period.
 Net Investment = Gross Investment less
depreciation.
 Capital stock at end of period = capital
stock at beginning of period +net
investment
Qualifications to the Income
Accounting Identity
 To go from GDP to national income:
 Add net foreign factor income.
 National income is all income earned by citizens
of a nation and is equal to GNP.
 To move from "domestic" to "national" we add
net foreign factor income.
 Subtract depreciation from GDP.
 Subtract indirect business taxes from GDP.
The Income Approach
 National income is the total income
earned by citizens and businesses in a
country in one year.
 It consists of employee compensation,
rent, interest, and profits.
 NNP at factor cost = National Income
GDP and GNP:
 GNP is total value of goods and services
produced in a year by domestically owned
factors of production (only final goods)
regardless of where the output is produced
 E.g. German owned car factory in US is a
part of German GNP.
 GDP is value of final goods and services
produced within a country’s borders.
GDP and GNP:
 Output of the Honda plant in USA is a
part of US GDP but Japanese GNP
 Wages paid to American employees is a
part of US GNP
 Profits from the plant are a part of
Japanese GNP but not GDP
National income
 National Income = net national product at
factor cost
 NNP at factor cost = GDP at market prices less
indirect taxes plus subsidy+ NFIA less
depreciation
 NFIA can be positive or negative= receipt of
factor income from the rest of the world minus
the payment of factor income to the rest of the
world.
National income:
 Total of income earned by the factors of
production , owned by a country’s
citizens.
 =compensation to workers+ proprietors
income (income of unincorporated
business)
+ corporate profits+ net interest (paid
by business)+ rental income
Personal Income
 Personal income (PI) is national
income plus net transfer payments from
government minus amounts attributed
but not received.
PI = NI + Transfer payments from government
+ Net non-business interest income
– Corporate retained earnings
– Social security taxes
PERSONAL INCOME
 GDP + NFIA = GNP
 Less depreciation = NNP

 Less indirect taxes plus subsidies

=national income (NNP at factor cost)

Less (corporate taxes+ retained profits)
Plus interest income received from government
Plus transfer payments
= Personal Income
Disposable Income:
 Disposable personal income is
personal income minus personal income
taxes and payroll taxes.
 Disposable personal income is what
people have readily available to spend.
DPI = PI - Personal taxes
 Uses of GDP Accounting:
 GDP figures are used to make comparisons
among countries and to measure economic
welfare over time.
 GDP gives a measure of economic size and
power.
 Per capita GDP is another measure often used
to compare nations' GDP.
 Because of differences in non-market activities,
per capita GDP can be a poor measure of the
living standards in various nations.
 GDP figures leave out the following:
 Illegal drug sales.
 Under-the-counter sales of goods to avoid
income and sales taxes.
 Work performed and paid for in cash.
 Unreported sales.
 Prostitution, loan sharking, extortion, and
other illegal activities.
GDP as an indicator of economic
welfare:
 GDP excludes unpaid economic activity
 Comparisons between countries are
distorted by changes in exchange rates.
 In countries with a large underground
economy , underestimation is likely
 GDP does not give indication about
standards of living
 It ignores distribution of income.
GDP as an indicator of economic
welfare:
 Nominal GDP values ignore inflation
 High GDP values are often correlated
with negative externalities such as
pollution
 Natural disasters raise GDP values but
does not indicate a healthy economy.
Limitations of National Income
Accounting
 Measurement problems exist.
 GDP measures economic activity, not
welfare.
 Subcategories are often interdependent.
 Non market activities are not accounted
for.
Real vs nominal GDP
 Just because GDP rose does not mean welfare
rose – it could be only prices rose.
 Comparing output over time is best done with
real output which is nominal output adjusted
for inflation.
 Nominal GDP is GDP calculated at existing
prices.
 Real GDP is nominal GDP adjusted for
inflation.
Real GDP
 Real GDP is arrived
at by dividing
nominal GDP by the
GDP deflator.
 GDP DEFLATOR:
qty1 qty2 prc1 prc2 gdp1 gdp2

 Ratio of nominal to
real GDP
 Prices of current and A 6 11 .5 .4 3 4.4
base year are
weighted by quantities B 7 4 .3 1 2.1 4
of current year.
 Nominal GDP has C 10 12 .7 .9 7 10.8
gone up by 58.7%but
GDP at year 1 prices
=15.10 .So an 12.1 19.2
increase of 24.8%
Purchasing Power Parity:
 Purchasing power parity is used to get
around the problems of per capita GDP.
 Purchase power parity adjusts for
different relative prices among nations
before making comparisons.
 E.g. McDonald Index
Laspeyre’s Index:
 Cost of purchasing base year basket at
current year prices divided by cost of
base year basket at base year prices
New WPI LAUNCHED