CHAPTER TWO

NATIONAL INCOME ACCOUNTING

 Introduction
 National Income Accounting (NIA) refers to the measurement of
aggregate economic activity, particularly national income and its
components; *Aggregate = Total or Gross
 It is the process of:
 record keeping for the overall economic activities of a given country;

 Elements of National Economy Elements of National

Economy

 Gross Domestic product (GDP) Government expenditure

 Total money supply Inflation
 Trade Balance Current Account Balance
 Balance of Payment (BoP) Exchange Rate
Why National income Estimates?
National income and product estimates are use full in
there aspects;
I) It gives useful information about the economic
performance of nation's overtime.
II) It provide information about the structural changes taking
place in an economy.
III) It also tells about the contribution of different sectors of
the economy to the national product.
Measuring Economic Activity: National Income And Product
Accounts (NIPA)
 National income accounts have two sides: a product side and
an income side
Product side: Flow of goods and services currently produced
are measured by expenditures on these goods and services by
consumers, businesses, government and foreigners.
Income side: measures the factor income that are earned by
workers in current production
 The product and income sides are two different measures of
the same continuous flow.
 GDP/GNP
GDP is a measure of all final goods and services produced in
a nation evaluated at market prices in a given time period.
GNP is the total money value of final out put produced in a
country and out side the country territory by our citizens in
each year.
Approaches to Measure GDP
The Product/value added approach
The Expenditure approach
The Income approach
 The Product Approach/ value add approach
Add up the value of all the final goods and services
produced in the economy.
In this calculation we excludes the value of intermediate
goods and services.
The value added of any producer is the value of its
output minus the value of the inputs it purchases from
other producers.
 Example;
 Farmers sold wheat=$500
 Flour factory=$1100
 Café Delight … Bread=$1250
GDP=500 +(1100-500) + (1250-1100)
= 1250
 Expenditure approach
Adding up aggregate spending by ultimate users on
domestically produced final goods and services
GNP/GNP in this approach can be broken down into
four components;
1. Personal consumption expenditures (C);
2. Gross private domestic investment (I);
3. Government consumption expenditures & gross
investment (G) &
4. Net exports (NX)
 GDP ≡ C +I + G + NX
Measures GNPTheinIncome /Factor Payments Approach
terms of income earned by the factors of
production.
1. Compensation of employees (wages, salaries)
2. Proprietors’ income (income of non corporate business)
3. Rental income (R)
4. Capital consumption allowance (D)
5. Corporate profits (income of corporations before tax)
6. Net interest (r)
7. Indirect business tax (IBT)
8. Subsidy/ transfer payment (T)
 NI= (W+S) + R +r + ∏
 GDP = NI- T +IBT +D+e
Example: calculate GDP using income and expenditure
approach.
Items Birr
Transfer payment 50
Interest 150
Depreciation 36
Wage 67
Business fixed Investment 74
Business profit 200
Indirect business tax 74
Rental income 75
Net export 18
Net factor income 0
Government purchases 156
Consumption 304
What GDP Omits?

Nonmarket Goods and Services

Underground Activities, both Legal and Illegal
Sales of Used Goods
Financial Transactions
Government Transfer Payments
Leisure
 Other measures of Income
GNP
GNP = GDP + factor payment from abroad - factor payment to
abroad.
Net national product (NNP)
Net national product (NNP) = GNP-D
National Income (NI)
NI = NNP –IBT
Personal Income (PI)
PI = NI - Undistributed corporate profits - Social insurance
taxes - Corporate profits taxes + Transfer payments+ Dividends
Disposable personal Income (DPI)
DPI = PI - Personal tax
 Real and Nominal GDP
Nominal GNP: is the value of final out put measured in the
price of the period the out put is produced (current price)
 Real GNP: is the value of final out put measured in prices of
a base period (constant price). It is intended to measure the
changes in physical out put with in consecutive periods.
GDP Deflator
The GDP deflator, also called the implicit price deflator for
GDP, is defined as the ratio of nominal GDP to real GDP:
GDP Deflator.
The GDP deflator reflects what’s happening to the overall
level of prices in the economy.
Example, using the following information calculate RGDP, NGDP
And GDP deflator. Use 2009 as base year.
Year Price 1 Price 2 Good 1 Good 2
2009 5 3 10 15
2010 7 8 9 16
2011 10 10 11 12
2012 11 9 12 10
2013 15 16 13 11
2014 20 25 10 9
 GDP and Welfare

Standard of living of a given country’s citizens is usually

proxied by real GDP per capita income:
RGDPC = RGDP/total population
However, output per capita is an imperfect measure of living
standards because:
First, many things that contribute to our economic welfare are
not captured by GDP at all: leisure time, an equitable
distribution of income, a sense of community, and more.
Second, GDP also ignores economic “bads”-crime, pollution,
traffic congestion, and more-which make us worse off
Finally, GDP does not distinguish between production that
makes us better off and production that only prevents us from
becoming worse off-traffic accidents, insurance, legal services