The National Income

Accounting
MC SSE 107
 CIRCULAR FLOW DIAGRAM

• The circular flow model demonstrates how money moves

through society.

Circular Flow of Income and Expenditure:

• Two Sector Model (Household & Firm)
• Three Sector Model (Household, Business, Govt.)
• Four Sector Model (Household, Business, Govt. Foreign
Sector
Four Sector Model
What is National Income Accounting?
• The National Income Accounting- deals with the measurement of
aggregate production and income.

• National Income- is the money value of all economic activities of the people of a
country in a year.
• National Income is also meant:
• What is included in and excluded from the National Income
• What method is used for estimating National Income

National Income is analyzed broadly with the help of two concept

measures:
 Gross National Income (GNP)
 Gross Domestic Income (GDP)
 Gross Domestic Product

• The Gross Domestic Product (GDP) is the money

value of all final goods and services produced
within the domestic territory of a county during
a year.

GDP = C+I+G+X-M
GDP can be measured by three methods:
• Expenditure method: It measures the total expenditure incurred by all entities
on goods and services produced within the boundaries of a country. The above
mentioned formula is used to calculate GDP by expenditure method. GDP=
C+I+G+(X-M)
• Output method: It measures the market value of all goods and services
produced within the borders of the country. It is known as GDP at constant
price or real GDP. The formula is: GDP as per output method= Real GDP – Taxes
+ subsidies
• Income method: It measures the total income earned by the factors of
production, which are labour and capital within the boundaries of a country.
The formula for this is GDP by income method= GDP at factor cost +Taxes –
Subsidies
Other measures of Output and Income
• Gross National Product
• Net National Product
• National Income
• Personal Income
• Disposable Personal Income
 Gross National Product
• The Gross National Product (GNP) is the total market
value of all final goods and services produced annually in
a country plus net factor income from abroad.

GNP = GDP+NFIA (Net Factor Income from Abroad)

• Includes: Goods and services government exp. + private domestic

investment in capital goods + export & imports + Net factors income
from abroad
 Net National Product (NNP)
• Derived by subtracting depreciation allowance from GNP.

NNP = GDP-depreciation

National Income at Factor Cost (NI):

Sum of all incomes earned by the resources suppliers for their
contribution of land, labour, capital, and organization.
NI= NNP + Subsidies - Interests
• Personal Income (PI) is the total money income received by individuals and
households of a country from all possible sources before direct taxes.
PI= NI – Corporate Income Taxes – Undistributed Corporate Profits –
Social Security Contribution + Transfer payments
• Disposable Income (DI) the income left after the payment of direct taxes
from personal income is called disposable income. Disposable income
means actual which can be spent on consumption by individuals and
families.
DI= PI – Direct Taxes
• Per Capita Income (PCI) per capita income of a country is derived by
dividing the national income of the country by the total population of a
country. Thus,
PCI= Total National Income/Total National Population
 Real and Nominal Measures

• Nominal GDP
- Measures output in terms of its current value
• Real GDP
- It is adjusted for changing price level
 Gross Domestic Products Shortcomings

• Underground Economy - The underground economy (or black market) refers to

cash and barter transactions that are not formally recorded in GDP and are often
used to support the trade of illegal goods and services. The scale of underground
economies varies greatly between nations, and, in some cases, they make up a
substantial percentage of a country’s economic output.

• Environmental Abuses- Often, producers can increase their output by polluting or

damaging the environment. In developed countries, production is better regulated,
and companies that violate environmental laws can face severe fines and penalties.

• Increases in Product Quality- As technology advances, producers are able to offer

increasingly better products for reduced production costs.
Thank you for
Listening!