National Income Accounting

National income is the monetary value of

overall final goods and services produced in
an economy during one year through the
productive activities.
• According to the Marshall, “ the labor and
capital of the country acting on its natural
resources produce annually a certain net
aggregates of commodities ,material and
immaterial, including services of all kinds, is
the true net annual income.”
• According to the Gardner Ackley ,“National
income is the sum of wages, salaries,
commissions, bonuses and other forms of
employees earning , net income from rentals
and royalties, interest income and profit
whether of a corporation, partnership or
proprietorship whether paid out to the
owners or retained in the business and before
deduction of taxes based income.”
• National income is the aggregate of factor
income derived in terms of wages, interest,
rent and profit.
Thus,
NI = W + R + I + P
• According to the Simon Kuznets “The net
output of commodities and services flowing
during the year from the country’s productive
system in the hands of ultimate consumers.”
 Concepts of National Income
1. Gross Domestic Product
GDP = C + I + G + (X-M)
Where,
C = consumption expenditure
I = investment expenditure
G = government expenditure
X-M = net export
2. Gross National Product
GNP = GDP + Net factor income from abroad
= GDP +NFIA
3. Net National Product
NNP = GNP – depreciation charges
4. National income at factor cost
NI at factor cost = NNP at market prices –
Indirect taxes + subsidies
5. Personal income
PI = NNP at factor costs – Undistributed
corporate profit – Corporate taxes- SSC+
Transfer payments
6. Disposable income
DI = Personal Income – Direct Taxes
7. PCI = NI/ total population etc.
• Nominal and Real GDP:
•  
• Nominal GDP values goods and services at current prices.
•  
• Formula: Nominal GDP= ∑Pi1.Qi1,
•  
• Where: Pi1=Prices of different goods of current year.
• Qi1=Quantity of different goods produced in the
current year.
 
• Real GDP measures the amount of output –
that is, valued at constant (base- year) prices.

• Real GDP= ∑Pi0.Qi1

 
• Where: Pi0=Prices of different goods at base
year.
• Qi1=Quantity of different goods produced in the
current year.
 
GNP deflator = Nominal GNP / Real GNP x 100

GDPMP=(P1Q1+ P2Q2+…….+ PNQ

GDPFC= GDPMP –Indirect Taxes +Subsidies

 GNPMP=(P1Q1+ P2Q2+…….+ ,QN) + net income from

abroad
• Methods of GNP computation:

• The income approach to GNP

• The expenditure approach to GNP
• The product approach to GNP
 
1) Income method to GNP
GNP can be measured by aggregating the
annual flows of factor earnings generated by
the production of the final output. This
method is also called as factor share method.
In this approach GNP is the sum total of the
following items:
• Income Headings
 
Wages, Salaries, allowance
  Rent
  Interest
  Corporate Profits
  Income received from self employees
Indirect taxes
Depreciation
Gross Domestic Income (GDI)
Net Income from Abroad
Gross National Income (GNI)
Less Depreciation
Net National Income (NNI)
2) Expenditure method to GNP:
  In this method NI is measured by adding up all
the expenditures made on goods/s during a
year.
It includes the following item:
GNP = C + I + G+ ( X – M ) + Net factor income
from abroad
3) The product approach to GNP

• Sectors
• Primary Sectors
( Agri, Forestry, Fishery )
• Secondary Sector
(Industrial, mining, electricity )
• Tertiary Sector
(Manufacturing, metal, food processing)
• Services
(Transport, Communication)
 Value added and final goods methods

• Value added; only value additions are

recorded
Value addition = price of final product – cost for
intermediate goods
• Final goods method
Price of final goods are recorded while counting
NI.
They help to avoid double counting.
Gross Domestic Product (GDP)
Net Income from Abroad
Gross National Product (GNP)
Less Depreciation
Net National Product (NNP)
 Problems in the Measurement of National Income
 
• Defining the nation
• Some goods and services are difficult to
measure in terms of money
• Possibility of double counting
• Whether to include transfer payment in
national income or not
• Measurement of Inventory
• Change in price
• A large portion of goods are not brought to the
market for sale
• Most producers do not keep their accounts
• Lack of occupational specialization
• People are socially backward and illiterate
• Non-availability of data
• Measurement of depreciation
• Underground economic activities etc.
• Importance of National Income Analysis:
• National Income is an important index of the overall
performance of the whole economy.
• Useful to plan the economy
• It indicates the economic conditions of the people
• Useful to compare the economic conditions of
different countries
• Useful to design economic policy
• Useful in business decision making etc.
• GDP at mp = GDP at fc + NIT
• GDP at fc = 100+ 5+ 2+ 8+6+4 +150+25= 300
• GDP at mp = 300+30-10=320