Measurement of National Income

Accounting

Baikuntha Pandey(Ph.D. Scholar)

Asst. Professor, PMC
baikuntha2027@gmail.com
 A)The Expenditure Approach

• National expenditure is calculated by adding all the

expenditures made by individuals, business and the
government on goods and services during a year. If all
sectors' expenditure are added, GDE is derived . It includes
a) private consumption expenditure of household (C)
b) Gross domestic private investment of business sector(I).
c) Government expenditure on goods & services (G )
So, GDE= C+I+G
GNI = C+I+G+ Net income from abroad
NNI = GNI - Depreciations
 Calculation of value of the economy's output must
include the price for goods and services produced
actually paid for it. In order to get the concept clearer,
we need to consider as the followings:
Exclusion from expenditure :
• changes in ownership of preexisting output as they are
not part of the total expenditure that measures the
value of current output.
• sales and purchases of bond and stock.
• transfer payments from the government.
• Adding the changes in miller’s inventories to their net fixed
investment yields the correct figure of the economy's final
product.
• If for any time period, all industries combined show increase in
inventories, the economy's final product will exceed the total
consumption spending, government spending and business net
fixed investment spending. In such case ,the net change in
inventories must be added to the total spending flows.
• Similarly, a decrease in inventories must be subtracted from the
total spending flows. Hence, total for final product is equal to
final sales plus the changes in business inventories.
 B)Income Approach

National income is calculated by adding the income of all

individuals or factors in a country. It includes income from:
• wages, Salary allowances,
• rent
• interest
• corporate profit (profit tax, dividend & undistributed profit )
• income from self-employed
• indirect Taxes
• The total of all these heading = GDI
• GNI = GDI + NIFA
• NNI=GNI- Depreciation
 In general, we may include only those income flows that
originate with the production of the goods and services
whose total we seek to estimate. Only then will the total of
the income flows equal the total of goods and services. We
need to consider as follows to arrive at the conclusion
Exclusion from income –
1) sales of building, automobiles or any other goods produced
in an earlier time period.
2) sales of stocks and bond
3) Income from government transfer
4) Inter-personal transfer
 C) Output Approach

• This method is also known as national income by sector

origin. To measure income from this method ,the economy
is divided into different sectors like agriculture, industry,
transport ,communication etc. The aggregate of all sectors
is termed as GDP. But double counting should be avoided
to find the accurate situation of national income. There are
two popular methods for accessing national income –
1. Final Product Method – The price of intermediate goods, The
value of goods produced previous year and price for the
machine, equipments imported are to be adjusted to find
out the actual value of GDP.
2) Value Added Method-
 Concepts of NI

1)GDP at market price=C+I+G.

GDP at factor cost=GDPmp +subsidies-indirect taxes.
2)Net Domestic Product(NDP)mp =GDPmp –depreciation.
3)Gross National Product(GNP)mp =GDPmp +Net
foreign income from abroad( NFIA)
GNP at FC =GDP fc +( NFIA)
4)Net National Product(NNP)mp =GNPmp –depreciation.
NNP at FC =NNPmp –Indirect tax+subsidies.
5)National Income (NI)=NNPfc .
6) Personal Income(PI)=NI-CT-UCPT- SSC+ Transfer
payment.
7)Disposable Income(DI)=PI-Direct taxes.
8) Per capita Income (PCI)=National income of a
particular year/Population in that year
 Limitations

• Problem of double counting

• Problem of statistical data
• Windfall gains or losses
• Income from illegal activities
• Non monetized economy
• Illiteracy and ignorance
• Inventory valuation
• Fluctuations in the money value and prices
• Why resource gap is equal to the current account?
• Resource gap and current account balance of the BoP essentially measure the
same concept: how much resources does a country need to borrow? It can be
shown by suing the following macroeconomic identity:
•
• GNDI=GDP + Net Factor Income from Abroad +Net current Transfers
• GNDI=C+ I+ X-M+ Net Factor Income from Abroad +Net current Transfers
• GNDI-C= I+ X-M+ Net Factor Income from Abroad +Net current Transfers
• Gross National Savings= I+ X-M+ Net Factor Income from Abroad +Net current
Transfers
• Gross National Savings-I= X-M+ Net Factor Income from Abroad +Net current
Transfers
• Gross National Savings-Gross investment = Trade balance + Net Factor Income
from Abroad +Net current Transfers
• Resource Gap= Current account balance.
• Net factor income from abroad(AFIA) includes the income
earned by residents of a country from their investments /work
abroad minus the income earned by foreign residents from
their investments/work within the country. It typically includes
wages, interest, profits, and dividends.
• Net current transfers(NCT) from abroad include transfers of
money or goods between residents and non-residents of a
country that are not in exchange for any economic activity.
This includes items such as remittances, foreign aid, and
grants.
• What is resource gap?
• Resource gap is the gap between saving and
investment. If a country saves less but needs more
resources for investment, resource gap is negative.
Thus, it can be defined to be the difference between
gross national saving ratio and gross capital formation
ratio. As of 2020, the gross national saving ratio of
Nepal is 34.9 percent whereas gross capital formation
ratio is 31.3 percent. Thus, resource gap is : 34.9-
31.3=3.6 percent. It implies that Nepal has sufficient
resources for financing investment requirements.
• What is gross national savings?
• Gross national savings is the difference between gross
national disposable income (GNDI) and consumption
expenditure. GNDI includes the sum of all incomes
received by the residents of the economy. It includes the
value GDP plus the sum of income, remittances and other
current transfers received from abroad minus the sum of
income, remittances and other current transfers received by
the foreign residents from Nepal. Since Nepal receives huge
amount of remittances, gross national saving is high around
40 percent even though gross domestic savings is low.
• How are GNI and GNDI calculated?

• GNI or gross national income measures the total income received by the
residents of an economy. It is calculated as GDP + income received by Nepali
factors of production from abroad -income paid to foreign factors of
production by Nepal.
• On the other hand, GNDI or gross national disposable income is the sum total
of income received by Nepal from all sources, it includes the income produced
in the economy plus income as well as all transfers received from abroad
minus income and transfers paid abroad.
• GNDI=GDP + Net Factor income from abroad + Net current transfers from
abroad.
• Thus, GNDI includes remittances, pensions and grants received from abroad.
As of 2020, the GDP of Nepal is Rs. 3943 billion, GNI is Rs. 3989 billion and
GNDI is Rs. 4972 billion.
• What is economic growth rate ? How the growth rate measured at
basic prices differs from the growth rate measured at market
prices?

• Economic growth rate is the rate of change in real output of the

economy. Thus, it is measured by the rate of change in real GDP not the
nominal GDP. It is because nominal GDP can increase due to increase
in prices even if there is no change in output.
• Next if we value real GDP without including the taxes and subsidies on
goods and services, such growth rate is called growth rate at basic
prices. On the other hand, if we include taxes and subsidies, we call it
growth at market/purchaser's prices. In general, growth rate at market
prices is generally greater than the growth rate measured at basic prices.
• GDP compilation in Nepal was started in 1961/62
• Regular compilation started since 1964/65
• Compilation is based on SNA recommendation and
current series are based on SNA 2008
• Base year is 2010/11
• Three years revision Policy (Preliminary, Revised,
Final) is applied
 GDP by expenditure approach 2022/23
(in million Rs.)
5100000
Pvt. consumption 5036149
Total consumption
4642274

3100000 Im-
ports
GCF
1964330
GFCF
1754158
Govt + NPISH consumption 1356457
1100000 Export
393874 397701 385112

Consumption Gross Capital Formation Net Exports

-900000

Change in Inventories
Net export -1579219
GDP = C+I+(X-M)
GDP = 5036149+1754158-1579219 = 5211089
-2900000

June 29, 2024 19

• SNA stands for System of National Accounts, which
is a standardized method used to measure the
economic activity of a country. The SNA method of
national income accounting measures the economic
performance of a country by tracking the flow of
goods and services through the economy.
• The SNA method of national income accounting is important
because it provides a standardized way of measuring the
economic activity of a country, which can be used for
international comparisons and to monitor economic growth
and development over time.
• The SNA method of national income accounting consists of three main
components:
1. Production Account: This account measures the output of goods and services
produced in a country during a given time period, usually a year. The
production account includes information on the production of both market and
non-market goods and services, as well as the value of intermediate goods
used in the production process.
2. Income Account: This account measures the income generated by the
production of goods and services, including wages and salaries, profits, and
taxes. It also includes income received from abroad, such as exports and
foreign investments.
3. Expenditure Account: This account measures the final expenditure on goods
and services by households, businesses, government, and foreigners. It
includes consumption expenditures, investment expenditures, and government
expenditures, as well as exports and imports.
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