Chapter No:02: National Income Accounting & Its Measurements

CHAPTER NO:02
NATIONAL INCOME
ACCOUNTING
& ITS MEASUREMENTS
LEARNING OBJECTIVES
 Recap…What is Macro Economics?

 Importance and Significance of Macro
Economics
 National income?
 Importance of national income

 Concepts of National income
 National income estimates
 Measurement of National income
 Difficulties in measuring National income.
2
What is Macro Economics?
 The part of economics which studies the overall
averages and aggregates of the economic system.
 It does not deal with individual incomes but with

the national income, not with individual prices
but with the general price level, not with
individual output, but with national output.
 e.g. Inflation, GDP, unemployment, standard of

living e.t.c
3
Macroeconomics deals with:
a) Measure the health of the whole economy
b) Guide government policies to address problems
Major economic goals:
i. Promote economic growth
ii. Limit unemployment
iii. Keep prices stable (control of Inflation)

4
DEFINITION OF NATIONAL INCOME
National Income is the monetary value of
all final goods and services produced in a
country during a year.
Four points to be noted in this definition
5
NATIONAL INCOME CONT…
As the family income reflects the economic
Position of household, thus, national income shows
the economic position of a Nation.
The basic objective of an economy is to achieve

economic Progress.
National income – help assess & compare the

progress achieved by a country over a period of
Time (say one year)
6
SIGNIFICANCE OF NATIONAL INCOME
1. To chart the movement of country…e.g. from
depression to prosperity.
2. To measure the economic welfare of community
3. To forecast the standard of living.
4. To help in determining the pace of economic
development of the economy.

7
SIGNIFICANCE OF NATIONAL INCOME CONT…
5. To understand the contribution made by

different sectors to the economy.
6. To help in development planning of a country.
7. To provide information of the savings,

consumption and investment structure of the
economy.
8
CONCEPTS OF NATIONAL INCOME
1.Gross Domestic Product

2.Gross National Product
3.Net National Product
4.National Income at factor cost
5.Personal Income
6.Personal Disposal Income
9
Concepts of national income continued…
1. GROSS DOMESTIC PRODUCT (GDP): is the market value
of all final goods and services produced within the
geographical boundary of the country specially for one
year is called GDP.
 Final goods and services in GDP refers to goods and

services produced for final use.
 Intermediate goods are goods produced by one firm for

use in further processing by another firm.
10
2. GROSS NATIONAL PRODUCT (GNP) at market prices is more
comprehensive than GDP.
GNP measures the total income earned by the permanent residents of a
country in a given time period.
GNP includes factor incomes earned from abroad by the residents of a
country and excludes income that foreigners earn from here.
In other words when net factor income from abroad is added to GDP,
we obtain GNP, and thus
GNP=GDP +Net factor income earned from abroad 11

3. NET NATIONAL PRODUCT (NNP) – means the market value of

all final goods and services after providing for depreciations.
 NNP – means the market value of all final goods and services
produced in a year is considered.
 It means that in the production of goods & services , there is

the consumption of capital goods such as equipment &
machinery.
 To get NNP the value of depreciation has to be reduced from

GNP.
Hence NNP=GNP-Depreciation
12
4. National income at factor cost – shows how much it

costs to society in terms of economic resources for
their contribution of land, labor , capital and
entrepreneurial ability which go into the year’s net
production.
 NI at factor cost=NI at market prices – taxes-

depreciation + subsidies
 NI at market price = NI at factor cost +taxes –

subsidies +depreciation
13
 Example: A motor car costs 2 lakhs which includes

excise duty of Rs.20,000. Market price of a car is 2
lakhs
 While the factors engaged in production get Rs.1.80
lakhs.
 Thus the value of national income at factor would

be equal to the market prices minus the indirect
taxes plus subsidies.
14
5.PERSONAL INCOME (PI) : PI is that income actually
received by the individuals or households in a country
during the year from all sources.
6. DISPOSABLE INCOME (DI): DI is that part of income which

is left behind after the payment of direct taxes.
Disposable income can either be consumed or saved.

Therefore Disposable Personal Income =Consumption +Savings
DPI = PI – PERSONAL TAXES
15
PERCAPITA INCOME :index of changes in the standard of

living of the people of a country.
The per capita income indicates the economic progress in

terms of goods and services available per head of the
Population.
PI=NI/population
16
MEASUREMENT OF NATIONAL INCOME
National income of an economy can be measured in three
ways.
 Product Method
 Income Method
 Expenditure Method
 Each method gives the same result

 There is no question of appropriate method
 Application of suitable method depends upon various
factors such as, availability of data, nature of economic
activity, economic and social structure..
So for calculating national income a combination of all three

methods is used in Pakistan.
17
MEASUREMENT OF NATIONAL INCOME CONT…
1. Product Method : There are two approaches in product method for
measuring National Income.
This method is used for estimating domestic product in the following

sectors: Agriculture, Manufacturing & Services.
In this approach, Gross Market Value of all final goods and services
produced in a financial year in the domestic territory of country are
taken into account for measuring national income.
The value so arrived is called Gross Domestic Product (GDP) at

Market Price
18
2. INCOME METHOD: Here National income is
calculated by adding all the factor incomes of all the
normal residents of a country during a year.
Domestic income by this method includes both income

accruing to private sector and income accruing to
Govt./Public sector.
a. Rent including imputed rent.

b. Wages and salaries
c. Interest.
d. Entrepreneurship
19
3. EXPENDITURE METHOD: in this method, final expenditure
on all the products at their market value, produced during a
particular period is measured for estimating domestic income.
Whatever is earned as income in an economy will be either

consumed or invested (saved), therefore final expenditure can
be divided in two parts :
Final consumption expenditure &

Final Investment expenditure.
That is why, this method is also called “ Consumption and

investment method”
20
DIFFICULTIES IN MEASURING NATIONAL INCOME
1. The output of the non-monetized sector.
2. Non-availability of data about the income of small
producers or household enterprises
3. Absence of data on income distribution
4. Unreported illegal income
5. Double counting
21
Measurement of national income
–Product method
 Estimation of goods & services produced in 3 sectors.
 The sum total of products produced in these three

sectors is the output of the nation.
 GNI- Money value of total goods & services + Income from

abroad.
 This method helps us to find out contributions of various

sectors to national income
22
Agriculture Manufacturing Services
Agriculture & allied Registered industries Communications
products
Forest Non registered Banking Insurance
industries
Fishing Electricity Public administration
Mining Trade Health
Manufacturing Education
Other services.
23
Measurement of National Income
–Product method
Under Product method, following categories of production are
added in order to find out GNP(NI)
(a) Product of agricultural sector –total value of food grains

produced by the farmers in the country during a year.
(b) Product of Industrial Sector – Total market value of all goods

produced in various industries like electronics, cement, steel etc. in
a country during a year.
(c) Products of trade: induces income resulting from various activities

which are connected to internal trade
24
–Product method
(d) Service sector incomes: total value of the proceeds of the
service sector namely, the services of government servants,
doctors, lawyers, soldiers, singers, players etc.,
(e)Foreign
trade: value of exports –income earned abroad –to be
added and the value of imports or payments made abroad should
be deducted.
(f)IndirectTaxes and Subsidies: indirect taxes which are included

in the price should be deducted to get exact market value of the
goods.
Subsidies given by Govt to certain products should be added
to calculate the exact value of the product
25
–Expenditure method
National income – also calculated by adding up the
expenditure incurred on goods and services. Government as
well as individuals spend money for consumption and
production purposes.
The sum total of all expenditures incurred in a country

during a year will be equal to national income.
GNI=Individual expenditure + Government Expenditure
26
Measurement of national income –
Expenditure method
Expenditure approach – following categories of expenditure are added in
order to find out the GNP
(a) Personal Consumption expenditure : on durable goods & non –

durable goods produced in a country during a year.
Expenditure on services, such as transport , education and medical.

Expenditure on household.
(b) Government purchase of goods and services : goods such as paper,

stationery, machinery, equipment etc.,
Services: Govt. incurs expenditure on payment of salaries t Military
personnel, police and administration.
27
Measurement of national
income –Income method
Expenditure made by the people in a country on goods and services
produced in a country during a year becomes the income of the various
Factors.
The factor income is grouped into following categories:
 Wages and salaries

 Income of Company business
 Rental incomes of persons
 Corporate profits
 Income from net interest
28
IMPORTANCE OF NATIONAL INCOME
ESTIMATES
.
1. Reveals the picture of the economy and indicates rise in standard

of living –reveals the improvement of economic welfare
2. NI –reveals overall production in each year –reveal real growth

The economy- if growth is stagnant – measures can be adopted to
increase NI
3. NI shows the contribution made by different sectors of the

economy.
4. NI estimates throws light on the three major aspects of the

economy namely , consumption, savings, and investment.
5. NI figures used to measure the economic welfare in different

countries
29
IMPORTANCE OF NATIONAL INCOME
ESTIMATES
6. Role of. the government in the national economy.
7. No development planning is possible without complete

study of national income estimates.
8. NI estimates are very useful in formulating plans for the

development of agriculture, Industry, and infrastructure
etc.,
30
DIFFICULTIES/ISSUES IN THE MEASUREMENT OF
NATIONAL INCOME
1. Difficulty in defining the ‘Nation’ –NI

includes not only the income produced
within the country, but also income earned
in other countries.
2. Non –availability of a data about the income

of small producers or household enterprises.
3. The error of double counting- failure to

differentiate final and intermediate goods.
31
NATIONAL INCOME CONT…
5. Unpaid services: services performed for love, kindness and

mercy and not for money have no money value
But have only economic value. These are excluded from NI
figures and leads to the under estimation of the NI.
6. Individuals do not keep correct account of their consumption.
7. Illiteracy and ignorance.
8. Lack of proper criteria for measuring the value of services.

32
NATIONAL INCOME
9. The services of housewives is not included in the NI because
is not sold in the market.
10. Income for illegal activities: black marketing, gambling,

smuggling etc., not included in the national income thus
reducing the real value of the national income.
11. The output of non monetized sector: Pakistan agriculture

based - considerable portion of the out put does not come to
the market for sale.
12. The non co-operation of the people: Major part of the

population are illiterate and hence may not co-operate in
providing the information is needed for the estimation
33
of NI.
THE END
QUESTIONS…???

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Chapter No:02: National Income Accounting & Its Measurements

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CHAPTER NO:02

 Recap…What is Macro Economics?

 Importance of national income

 It does not deal with individual incomes but with

 e.g. Inflation, GDP, unemployment, standard of

a) Measure the health of the whole economy

b) Guide government policies to address problems

Major economic goals:

i. Promote economic growth

ii. Limit unemployment

iii. Keep prices stable (control of Inflation)

National Income is the monetary value of

all final goods and services produced in a

country during a year.

Four points to be noted in this definition

The basic objective of an economy is to achieve

National income – help assess & compare the

1. To chart the movement of country…e.g. from

2. To measure the economic welfare of community

3. To forecast the standard of living.

4. To help in determining the pace of economic

development of the economy.

5. To understand the contribution made by

6. To help in development planning of a country.

7. To provide information of the savings,

1.Gross Domestic Product

 Final goods and services in GDP refers to goods and

 Intermediate goods are goods produced by one firm for

2. GROSS NATIONAL PRODUCT (GNP) at market prices is more

comprehensive than GDP.

GNP measures the total income earned by the permanent residents of a

country in a given time period.

GNP includes factor incomes earned from abroad by the residents of a

country and excludes income that foreigners earn from here.

we obtain GNP, and thus

GNP=GDP +Net factor income earned from abroad 11

3. NET NATIONAL PRODUCT (NNP) – means the market value of

 It means that in the production of goods & services , there is

 To get NNP the value of depreciation has to be reduced from

4. National income at factor cost – shows how much it

 NI at factor cost=NI at market prices – taxes-

 NI at market price = NI at factor cost +taxes –

 Example: A motor car costs 2 lakhs which includes

 Thus the value of national income at factor would

6. DISPOSABLE INCOME (DI): DI is that part of income which

Disposable income can either be consumed or saved.

DPI = PI – PERSONAL TAXES

PERCAPITA INCOME :index of changes in the standard of

The per capita income indicates the economic progress in

 Each method gives the same result

So for calculating national income a combination of all three

This method is used for estimating domestic product in the following

The value so arrived is called Gross Domestic Product (GDP) at

Domestic income by this method includes both income

a. Rent including imputed rent.

Whatever is earned as income in an economy will be either

Final consumption expenditure &

That is why, this method is also called “ Consumption and

1. The output of the non-monetized sector.

2. Non-availability of data about the income of small

producers or household enterprises

3. Absence of data on income distribution