Tools of Measuring Economic Activities

Prepared By: Santosh Acharya

Lecturer of EMBA-II Sem. @ KVC
Macroeconomics
 Content

1. Concept of National Income

2. Measurement of national Income
3. Problems of NI Accounting

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Concepts of National Income
Gross Domestic Product (GDP): GDP is the market
value of all final goods and services produced within a
given geographical region, namely country, during a
given period of time, generally one year. GDP includes
the four components viz. consumption expenditures (C),
investment expenditure (I), government expenditure (G)
and net exports (X – M).

Symbolically,

GDP = C + I + G + (X - M)
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Gross National Product. (GNP).

GNP is the market value of all final goods and services

produced by domestically owned factors of production
during a period of one year.

i.e. GNP = C + I + G + (X - M) + NFIA

= GDP + NFIA

where NFIA = Net factor income from abroad.

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Net National Product (NNP)
NNP is the market value of all final goods and services
after allowing for capital consumption allowances
(CCA) or depreciation.

Symbolically,
NNP = GNP - CCA or Depreciation
Where, CCA = Capital Consumption Allowance.

NNP is also known as the National income at market

prices
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 National Income (NI)

National income is that part of NNP which we obtain

deducing indirect taxes and summing up the subsides
given. NI is also known as the NNP at factor cost.

Mathematically,
NI = NNP - Indirect taxes + subsidies
= NNP at factor cost.

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Cont…
National income, from income side, is the addition of the
following components:

i) Wages, salaries, commissions, bonus and other forms of

employee earning (before deducing of taxes or social
security contribution).
ii) Net income from rental and royalties
iii) Interest Income
iv) Profit, whether of a corporate, partnership or
proprietorship whether paid out to owners or retained in the
business, and before deduction of taxes based on income.

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Personal Income: (PI)

This is the sum of all income actually received by all

individuals or households during a given year.
i.e. P.I = National income
- Social security contribution
- Corporate Income Tax
- Undistributed profits
+ Transfer payment
+ Interest on public Debt

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 Disposable Income (DI)

The income which remains after subtracting

direct taxes from personal income is called
disposable income.

Thus, Disposable Income i.e.

DI = Personal Income - Direct Taxes.
OR
DI = Consumption + Saving.
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Measurement of National Income Accounts

Measurement of National Income has been done

by three methods viz.
a). Expenditure
b). Income, and
c). Product Approach.
All three approaches give the identical
measurement of the amount of current
economic activities.

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 A) Expenditure Method

This method is from the side of expenditures.

Hence the personal consumption expenditure(C),

the gross private domestic investment as well as
the foreign investment (I), the government
purchase of goods and services (G) and net
export are added to obtain GDP.

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 S.No Expenditure Headings
1. Personal Consumption Expenditure (c)
i) Durables
ii) Non-Durables
iii) Services
2. Gross Domestic Private Investment (I)
i) Business fixed investment
 Non- residential structures
 Producer's Durable equipments
i) Residential Investment
ii) Inventory Investment
3. Government Purchase of Goods and Services (G)
4. Net Export (X - M)
i) Exports (X)
ii) Imports (M)
GDP = C + I + G + (X - M) + NFIA
= GNP – Depreciation or CCA
= NNP – Indirect Taxes + Subsidies
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= National Income or NNP at factor cost
B) Income Approach

According to this approach, the factor earning

of the economy is the sum total of rent,
wages, interest and profit. The incomes are
earned there from property or through work.
It can be presented on the following table.

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S.N. Headings

1. Compensation of Employees

2. Proprietor's Income

3. Rental Income of Persons

4 Corporate Profits

5. Net Interest

= NNP at factor cost or

National Income
+ Indirect Taxes - Subsides
= NNP
+ CCA or Depreciation
= GNP
- NFIA
GDP
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 Conceptual Clarity
1) Compensation of Employee: Wages and
salaries paid by the government and business
to the supplier of labor.
2) Proprietor's Income: Income of non
incorporated self-employed are included.
3) Rental Income: It includes the rent of land,
other rented proprietor, income and the
estimated rent of all such assets are used by
the owner themselves.
4) Corporate Profits: Corporate profits represent
the remainder on corporate income 07/24/2023
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5) Net Interest: which is paid out by the business sector.
6) National Income: National income is the summing up
of all the above five category.
7) Indirect Taxes: Those taxes imposed by government
are called as indirect taxes whose burden is shifted to
the other people.
8) Subsidies: Financial support given by the government
to the private firms and owned enterprises.
9) Depreciation: Depreciation is known as the
consumption unit of fixed assets or capital. Due to the
continuous use of capital assets it tears out, so we
deduce same amount from its initial value.
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 C. Product Approach
By this method, total product of the economy are
calculated for the year, and the value of this
how is equated to the market price.

Under the product approach there are two

approaches to estimate the national income
1. Final Product Method
2. Value Added Method

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 1.Final Product Method
Final Product Method is that one, that is produced and sold for
consumption and investment GDP excludes the intermediate
goods that are used to produce other goods. According to this
approach, GDP is estimated by finding the market value of
final goods and services produced in an economy during a
period of one year.
 Steps
 a) GDP at Market Price = Market values of all Final goods
and services
 b) GNP at Marked Price = GDP at Market Price + NFIA
 c) NNP at Market price = GNP at Market Price - Depreciation
or CCA
 d) National Income or NNP at factor cost = NNP at Market
Price - indirect taxes + subsidies.
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2. Value Added Methods:
In this method the value added at the different stages
of production is counted for calculating NI. Value
added is the difference between the value of materials
output and inputs at each stage of production.
 Value Added = Sales Value of Output - Cost of
Intermediate Goods = Sales - Cost
When we add such difference of all the industries in
the economy. We get the GDP of a nation.

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Steps
a) Industrial classification:
This method divides all producing sector in the
economy into three category, according to
their activities they perform. They are
i)Primary Sector (Agriculture called activities)
ii) Secondary Sector (Manufacturing,
Construction electricity etc.)
iii) Tertiary Sector (Banking Transport,
Insurance etc.)
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b) Computation of Gross Value Added:

Gross Value Added = Value of output - Cost of

intermediate goods
= Revenue - Cost

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c) Calculation of GDP:

GDP is the sum of gross value added of all sectors including

classified above sectors, gives GDP at factor cost.

GDP at factor cost = Sum of all gross value added

of all sectors

GNP at factor cost = GDP at factor cost + NFIA.

NNP at factor cost or National Income = GNP at factor

cost - Depreciation or CCA.
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Problems of NI Accounting

A. Conceptual Problems

1. National income is always measured in terms of money

but there are so many goods and services that cannot be
measured in term of money. Eg. painting as a hobby,
bringing up of children etc.
2. Problem of double counting arises while counting
national income which arises from the failure of to
distinguish properly between a final and intermediate
product, flour is intermediate product for bakery but
final to the household.
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Cont…
iii) National income account includes only those goods and
services produced by using legal activities but in reality
there may have various activities of production that has
been doing illegal activities. Thus, accounting national
income may reduce the size of the economy.

iv) Capital gains or losses which accrue to property owners

by increasing or decreasing in the market value of their
capital assets or changes in demand are excluded from the
GNP because such changes do not result from current
economic activities.

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B. Statistical Difficulties

i. Accurate and reliable data are not adequate, as far as output in

the subsistence sector is not completely informed. Small scale
and cottage industries also do not report their targets.
Indigenous bankers do not furnish reliable data and so on.

ii. Due to the large regional diversities they have different

culture , customs, languages etc. also create the problems in
computing the national income. People elsewhere do not
cooperate to collect data that is needed for NI measurement.

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Cont..
iii. Data should be complied collecting from the different
sector of the nation. Compiled data may not give the
actual result and moreover in developing nations
untrained and undertrained staff are still in the bureau
of statistics which is also another hindrance of NI
measurement.

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 Thank You

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