A) Introduction
National
income accounting plays a prominent role in economic theory. While talking about
national income somewhere we became little bit in confusion with the term
national product. So initially we will find the right point to know about
national income and national product first.
Both
national income and product are flow quantities related to a given time
dimension. While national product refers to the flows of final goods and
services produced during any given period of time. National income represents
the flow of total factors of earning available to purchase the net flow of
goods and services in the economy during any given time period, generally one
year. It is generally assumed that national income and national product becomes
equals only if the market is functioning perfectly.
G.
Ackley has defined national income considering equivalent to national product
as the economy's total current output of goods and services valued at the
market prices they command. National income reconciles of the following
heading:
a) Wages,
salaries, commissions, bonuses and other forms of employee earning (before
deduction of taxes and social security contribution)
b) Net
income from rentals and royalties
c) Interest
Income
d) Profit
including corporation, partnership or proprietorship;
Paid out to the owners or retained in
the business,
Before deducing taxes based on income.
B) Concepts of National Income
A
study of concepts of national income follows from the definitions of different terminology used. We discuss them as follow:
a) Gross Domestic Product (GDP): GDP
is the total market value of all currently produced 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).
Mathematically, GDP = C + I + G + (X -
M)
Where, C= Consumption Expenditure
I=
Investment Expenditure
G=
Government Expenditure
X-M=
Net Export.
Real And Nominal GDP
A sampling technique is used to
estimate it in two steps; first, counting the number of final goods services
and structures produced in the country (Qi), and second assigning
the dollar value of output (Pi). If assigning dollar value is done
using the current market price of outputs, it is called GDP in current
prices or nominal GDP. Nominal GDP
measures currently produced goods and services produced within the economy at
market prices. If the value of output assigns constant prices from base year,
then it gives the real GDP. Real GDP is also called GDP in terms of
goods or GDP in constant prices or GDP adjusted for inflation. This means while
calculating nominal GDP both i). Quantities of goods and services and, ii).
Price of the respective goods varies but in case of real GDP, i). Quantities of goods and services varies
but, ii). Price of the respective goods and services remains constant.
In short,
Real GDP = Nominal GDP / GDP Deflator
Where GDP Deflator = Current year's
price index / Base year's price index
(=100)
b) Gross
National Product. (GNP) : GNP
is the market value of all currently produced final goods and services produced
by domestically owned factors of production during a period of time, generally one
year. In other word, GNP is the total output of final goods and services
produced during any given period of time by the residents of a country.
Mathematically,
GNP
= C + I + G + (X - M) + NFIA
= GDP + NFIA
Where
NFIA = Net factor income from abroad.
c) Net
National Product (NNP): NNP is the market value of all final
goods and services after allowing for capital consumption allowances or
depreciation. NNP is also known as the National Income at market prices.
Mathematically,
NNP = GNP - CCA or Depreciation
Where
CCA = Capital Consumption Allowance
d) 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.
If
National Income is measured then we will sum up all the income received by the
factors of production(i.e. labor, land, capital and organization) owned by the
residents of a country.
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.
e) Personal
Income (PI) : This
is the sum of all income actually received by all individuals or households
during a given year. This can be obtained as;
PI = National income
- Social security
contribution
- Corporate Income Tax
- Undistributed profits
+ Transfer payment
+ Interest on public
Debt.
f) Disposable
Income (DI): The
income which remains after subtracting direct taxes from personal income is
called disposable income. Thus,
Disposable Income (DI) = Personal Income -
Indirect Taxes.
OR
DI = Consumption + Saving.
Methods
of Measuring National Income Accounts
Measurement
of National Income has been done with the help of three methods viz.
Expenditure, Income and Product method. All three approaches give the identical
measurement of current economic activities.
A) Expenditure Method
This
method measure the national income of a nation through the expenditure side. To
calculate the national income, initially GDP has calculated which includes the personal
consumption expenditure, gross private domestic investment, government purchase
of goods and services and transaction with international market. Summing up all
these four components gives us the GDP of a nation. To reduce GDP into Net
National Product at Factor cost, necessary adjustment are made and this process
of calculating National income can be shown as following table:
|
S.N
|
Expenditure Headings
|
Amount
|
in Rs
|
Billion
|
|
1.
|
Personal Consumption Expenditure (c)
|
|
|
55
|
|
|
i) Durables
|
20
|
|
|
|
|
ii) Non-Durables
|
25
|
|
|
|
|
iii) Services
|
10
|
|
|
|
2.
|
Gross Domestic Private Investment (I)
|
|
|
45
|
|
|
i) Business fixed investment
|
|
28
|
|
|
|
·Non- residential structures
|
17
|
|
|
|
|
·Producer's Durable equipments
|
11
|
|
|
|
|
i) Residential Investment
|
|
10
|
|
|
|
ii) Inventory Investment
|
|
7
|
|
|
3.
|
Government Purchase of Goods and
Services (G)
|
|
|
65
|
|
4.
|
Net Export (X - M)
|
|
|
-10
|
|
|
i) Exports (X)
|
|
23
|
|
|
|
ii) Imports (M)
|
|
33
|
|
|
|
GDP = C + I + G + (X - M) + NFIA
|
55 + 45 + 65 –10 = 155
|
5
|
|
|
|
=
GNP
–
Depreciation or CCA
|
|
15
|
160
|
|
|
= NNP
–
Indirect Taxes
+
Subsidies
|
|
3
2
|
145
|
|
|
=
National Income or
NNP
at factor cost
|
|
|
144
|
B) Income Method
According
to this approach, the factor earning of the economy is the sum total of real,
wages, interest and profit. The incomes are earned there from property or through
work. It can be presented on the following table.
|
S.N.
|
Headings
|
Amount is Rs. Billion
|
|
1.
|
Consumption
of Employees
|
75
|
|
2.
|
Proprietor's
Income
|
26
|
|
3.
|
Rental
Income of Persons
|
18
|
|
4
|
Corporate
Profits
|
15
|
|
5.
|
Net
Interest
|
10
|
|
|
=
NNP at factor cost or National Income
+
Indirect Taxes - Subsides
|
144
+ 3 – 2
|
|
|
=
NNP
+
CCA or Depreciation
|
145
+15
|
|
|
=
GNP
-
NFIA
|
160
-5
|
|
|
GDP
|
155
|
Conceptual
Clarity
1) Consumption
of Employee: It includes those wages and salaries paid by the government and
business to the supplier of labor. It is the income of the workers (excluding
the self-employed) and includes wages, salaries. employees benefits(including
contribution of employers to the pension plans), and employers contribution to
the social security.
2) Proprietor's
Income: Under this heading income of non incorporated self-employed are
included. It is the net income of sole proprietorship and partnership. the
proprietor of an owner operated business supplies labour, capital and perhaps
land and buildings to the business. it is difficult the split the income earned by owner operated
business into compensation for the labor, payments for the use of the capital
etc. Thus, NI accounts combine of all these into a single category as proprietor's
income. E.g. the amount that the owner of a cafe or a farm earns in a year is
often considered by the owner of a cafe or a farm earns in a year is often
considered by the owner of a cafe or a farm earns in a year is often considered
by the owner if the business as a 'profit', yet most of that 'profit' is a
payment to the owner for his labor.
3) Rental
Income: Rental income includes the rent of land, other rented proprietor,
income and the estimated rent of all such assets are used by the owner themselves.
It includes a) all rents received by households for lease of land and other
properties, and b) an imputed value for rent of owner occupied housing.
4) Corporate
Profits: Corporate profits represent the remainder on corporate income after
wages, interest and other costs have been paid. Corporate profit are used to
pay taxes levied on corporations such as the corporate income tax, and to pay
dividents to the shareholders. The rest of corporate profit after taxes and
dividends called retained earnings, kept undistributed by the corporation.
Corporate profit includes the amount that corporations pay in the form of the
corporate income tax, the amount they pay stockholders in the form of dividends
and the amount they save or retained within the business.
5) Net
Interest: This category includes only that interest which is paid out by the
business sector. This category does not include the interest that consumers pay
because it is not considered as a payment stemming from the production of
output not it does include interest that the government pays on its debts.
Government interest payments are seen as transfer because no output is produced
that the interest supports.
6) National
Income: National income is the summing up of all the above five category. It is
also known as NNP at factors cost.
7) Indirect
Taxes: Those taxes imposed by government are called as indirect taxes whose
burden is shifted to the other people. VAT, sales tax, excise duties etc are
the eg. of indirect taxes. Therefore they must be added to measure NNP of a
country.
8) Subsidies:
It is a financial support given by the government to 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.
C. Product Method
This
method measures the NI at the phases of production in the circular flow. It is
often called the Industry of Origin method. Under this method economy is classified
into various sectors namely, agricultural, industrial, manufacturing, foreign
transaction etc. In each sector we can make an inventory of goods produced and
find out the end value addition goods. Under
the product methods there are two approaches;
1. Final
Product Approach
2. Value
Added Approach
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 + NFAI
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.
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.
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.)
b) Computation
of Gross Value Added:
Gross
Value Added = Value of output - Cost of intermediate goods = Revenue - Cost
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.
Measurement
of the Final Product by the Value - Added and the Market Price Method
|
|
Farmer
|
Miller
|
Bakery
|
Consumers
|
Total Value
(in Billion)
|
|
Purchase of inputs
|
0
|
25
|
30
|
45
|
45
|
|
|
Zero cost to farmer initially
|
|
|
Consumers buy not to sale but to
consume
|
Final Product
|
|
Sales
|
25
|
30
|
45
|
-
|
¯
|
|
Value - Added
|
25
|
5
|
15
|
-
|
45
|
In
above table value added by each one of the three producers is the value of his
total money sales minus the cost of the inputs bought by him from the other
producers. The total money value added is Rs 45 Billion which is also the money
value obtained by valuing the total output of bread at its market price.
2) Limitations of National Income Measurement
The
calculation of national income of a country involves certain difficulties or
limitations. These are mainly due to the non-availability or partial
availability of detailed and reliable statistics about the different sector of
the economy. These limitations are discussed classifying into two catagory i.e
a) Conceptual Difficulties and b) Statistical Difficulties.
Conceptual Difficulties.
i) 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.
ii) 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.
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.
v) In
calculating NI, price changes fail to keep stable the measuring rod of money
for national income. When the price level in the countries rises, the national
income also shows an increasing even though the production might have fallen,
and country with a fall in price level the national income shows a decline even
through the production might have gone up. Thus national income data are
misleading and unreliable.
vi) National
income accounting may be difficult to estimate correctly from public service
workers. National income cannot measure the service of police and military at
the time of war and during peace.
vii) The
national income accounting does not take into consideration the actual cost of
production of a commodity.
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.
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.
Numerical Example
1. Consider
an economy produces three goods: apple, bread and computers. The
quantities and prices per unit in various years are as follows:
|
Variables
|
Year
2009
|
Year
2010
|
Year
2011
|
|
|
|
Qt.
|
Price
in Rs.
|
Qt.
|
Price
in Rs.
|
Qt.
|
Price
in Rs.
|
|
|
Apple
|
1,000
|
30
|
1000
|
40
|
1500
|
40
|
|
|
Breads
|
1500
|
20
|
1500
|
40
|
1500
|
40
|
|
|
Computer
|
10
|
10000
|
10
|
15000
|
10
|
15000
|
|
i.
Find
the nominal GDP in each year?
ii.
Assume
2009 as the base year and calculate real GDP in each year?
iii.
Find
the economic growth in 2010 and 2011?
Solution:
i) Nominal
GDP of Each Year
|
|
Year 2009
|
Total MP of each goods
|
|
Qt.
|
Per unit Price in Rs.
|
|
Apple
|
1,000
|
30
|
1000x30=30000
|
|
Breads
|
1500
|
20
|
1500x20=30000
|
|
Computer
|
10
|
10000
|
10x10000=100000
|
|
Nominal
GDP of 2009 =
|
160000
|
|
|
Year 2010
|
Total MP of each goods
|
|
Qt.
|
per unit Price in Rs.
|
|
Apple
|
1000
|
40
|
1000x40=40000
|
|
Breads
|
1500
|
40
|
1500x40=60000
|
|
Computer
|
10
|
15000
|
10x15000=150000
|
|
Nominal
GDP of 2010 =
|
250000
|
|
|
Year 2011
|
|
|
Qt.
|
per unit Price in Rs.
|
Total MP of each goods
|
|
Apple
|
1500
|
40
|
1500x40=60000
|
|
Breads
|
1500
|
40
|
1500x40=60000
|
|
Computer
|
10
|
15000
|
10x15000=150000
|
|
Nominal
GDP of 2011 =
|
270000
|
To sum up, Nominal
GDP
|
Years
|
Nominal
GDP
|
|
2009
|
160000
|
|
2010
|
250000
|
|
2011
|
270000
|
ii) To calculate real GDP,
We know that RGDP = Nominal
GDP/GDP Deflator
GDP Deflator = Current Year
Price/Base Year Price
Then,
RGDP = Nominal GDP
x(Base Year Price / Current Year Price)
Well, we have nominal GDP, now need to
calculate Price Index first
Consider
that 2009 is the base year, then total price of that year is
= 30+20+10000
=10050
As 2009
is base year then we consider that 10050 = 100
In 2010
price index would be = 100x(15080/10050) = 149.60 = 150(appro.)
In 2011
price index would be = 100x(15080/10050)
Note
that we have develop price index following the simple unitary rule.
Now we
get
|
Year
|
Nomina GDP
|
Price Index
|
RGDP
|
|
2009
|
160000
|
100
|
160000
|
|
2010
|
250000
|
150
|
250000x(100/150)=166666.67
|
|
2011
|
270000
|
150
|
270000x(100/150)=180000
|
iii)
Economic
growth of 2010 = (change in RGDP/RGDP of 2009)
x100.
Follow this formula (this is a simple formula
that we use to calculate percentage in our business) get the answer.
3) System
of National Income Accounting and Sector Accounting:
This
section deals with the process of measuring product and income originating in
the business, government, household and the rest of the world of an actual
economy. In the process, here we will find out the relationship between income
and product in an economy, but also setup a system of national accounts which
will trace the principal economic flow among the major sectors of the economy.
We begin the sector accounting with the business sector.
A) Business Sector:
We
can derive the business sector's account through the manipulation and
consolidation of the ordinary profit and loss of business firm. There are
basically three heading involves.
a) Gross
revenue from sales plus other non operating income
b) Cost
of Goods Sold
c) Profit
To
present the business sector account we divide above three heading in various
subgroup depending upon the nature of business sector. Here we present the
product account on the basis of U. S. Economy as presented by G. Ackley.
Consolidated Business Income and
Product Account
|
a) National Income Originating in Business
· Compensation of employees: Wages
salaries and supplements
· Net Interest
· Net Dividends
· Corporate undistributed profit
· Corporate profit tax liability
· Proprietor's income
· Rental income of persons
|
a) Consolidated Net Sales
· To persons.
· To government
· To abroad
· To business on capital account
b) Increase in Inventories
|
|
b) Adjustments of Market Price
· Indirect business tax liability
· Business transfer payments
· Current surplus of government
enterprises Less: subsidies
|
|
|
c) Net National Product originating in
business
|
|
|
d) Depreciation
|
|
|
Total
Expenditure
|
Total
Receipts
|
B) Government Sector
In
this sector we present a simple statement of government receipts and
expenditures and have shown in following table:
Government Receipts and Expenditures
Account
|
a) Purchases of goods and services
· From business
· From abroad
· Wages salaries and supplements
|
a) Taxes
· Personal tax receipts
· Corporate profit tax accurals
· Indirect Business tax accounts
|
|
b) Transfer payments
· To persons
· To foreign
|
b) Contributions for social insurance
· Employer
· Personal
|
|
c) Net Interest Paid
|
|
|
d) Subsidies
Less: Current surplus of government enterprise.
|
|
|
e) Surplus or deficit on income and product
account
|
|
|
Government Outlays and Surplus in
Total
|
Government Receipts in Total
|
c) Household Sector
Household
sector includes nonprofit institutions serving consumers, such as
non-governmental but non-profits schools, colleges and hospitals; voluntary
associations such as Red cross, Trust funds benefiting consumers; and private
pension and welfare fund including household in usual sense. Account of
Household sector has shown below in table.
Personal Income and Outlay Account
|
a) Personal Consumption Expenditure
· Purchase from business
· Wages, salaries and supplements
· Purchases from abroad
· Interest paid
|
a) Wages, Salaries And Supplements from
· Business
· Government
· Households
· Abroad
Less
employee & employer social Insurance contribution.
|
|
b) Personal Taxes
|
b) Rental income of person
|
|
c) Personal Saving
|
c) Proprietors income;
· Business and Professional
· Farm
d) Dividends
e) Personal interest income
f) Transfer payment
· Government
· Business
|
|
Total
personal outlay and saving
|
Personal
Income
|
d) Foreign Transaction Account:
Generally,
rest of the world (row) sector has been used instead of foreign transaction
account, But we have used foreign transaction account here to represent 'row'
as well as below:
Foreign Transaction Account:
|
Exports
of Goods and Services
|
Import
of goods and services
Transfer
payment by government
Net
foreign investment
|
|
Receipts
from abroad
|
Payments
to abroad
|
Thank You!!!
