Definition

• National Income Accounting is the systematic rendering of statements

about the performance of an economy during a period of time. National
Income Accounting is the process of measuring the national income of an
economy over a period of time. It tells us about the economic health of a
country over a period of time. It is very useful tool of measuring and
comparing living standards as well as formulating economic policies. It
shows the share of different sectors of an economy in the total income of
the economy. It helps us to find the per capita income of the country. It is
also an important indicator of economic development.
• Marshall's definition
• According to Marshall, "The labor and capital of a country acting upon its natural resources produce
annually a certain net aggregate of commodities, material and immaterial including services of all
kinds. This is the net annual income or revenue of a country or the national dividend."
•
• Pigou's definition
• According to Pigou, "National income is that part of objective income of the community, including of
course income derived from abroad which can be measured in money."
•
• Fisher's definition
• According to Fisher, "The national dividend or income consists solely of services as received by
ultimate consumers, whether from their material or from their human environments. Thus, a piano or
an overcoat made for me this year is not a part of this year's income, but an addition to capital. Only
the services rendered to me during this year by these things are income."
•
• Simon Kuznets` definition
• According to Simon Kuznets, "National income is the net output of commodities and services
following during the year from the country's productive system in the hand of the ultimate
consumers."
Gross Domestic Product (GDP)
GDP is defined as the total market value of the final goods and services produced
in an economy over a period of time, usually one year is known as the Gross
Domestic Product. GDP is a monetary measure of national income. In order to
calculate the GDP, the quantity of various goods and services are multiplied with
their respective prices and added to come to a monetary figure.
GDP=p1x1+p2x2+....pnxn=∑i=1npixi
Pi is market prices
Xi are final value of goods and services

The above equation shows that for n number of goods and services produced in an
economy over a period of one year, the GDP equals the summed up monetary
value of all goods and services in the economy.
GDP=C+I+G+(X-M)
Where,
C= consumption expenditure
I= investment/gross investment
G= government expenditure
(X-M)= net export
X= value of export
M= value of imports
FEATURES OF GDP

The important features of gross domestic product at market price are as follows:
1.It includes all final goods and services produced within the domestic territory of a
country by the resident as well as non-resident producers.
2.The GDP generally includes only those goods and services coming to the market for
transaction purposes.
3.Imputed value of some goods and service which do not come to the market for sale like
owner occupied dwellings, free accommodation to the workers etc. is included in GDP.
4.The price of goods and services refers to the prevailing market price in the accounting
year.
5.Transfer payments, capital gains and income earned through illegal means are not
included in GDP.
6.It includes only new goods and services. The value of second hand goods, financial
capital like shares and bonds are not included.
7.It includes depreciation allowance.
Gross National Product(GNP)
• GNP is the total monetary value of the final goods and services in an
economy over a period of time plus the net factor income from abroad. It
includes only those goods, which are produced using domestic factors of
production. In a time like this where factor mobility is not a surprising
phenomenon, ordinary residents of a country work abroad and are paid for
their services. Foreigners also render services in the domestic economy
and are paid their share of contribution. Hence, GNP subtracts the income
paid to the foreigners in the economy and adds the income earned from
giving services of nationals in the foreign economy.
• GNP=GDP+ Net factor Income Abroad(NFIA)
Therefore, GNP=GDP+net factor income from abroad(NFIA)
 Difference between GDP and GNP

Basis of distinction GDP GNP

It is the market value of final goods
It is the market value of the final
and services produced by the
Definition goods and services produced in a
ordinary citizens of a country over
country during a period of time.
a period of time.
Scope It is a narrow concept. GNP is a broader concept than GDP.
It focuses on the value produced It focuses on the value produced by
Main concern within a 'territory'. Here, territory the citizens of the country. The
is of importance. focus is on citizens, not boundary.
Inclusion of net factor income from It excludes the net factor income It includes the net factor income
abroad from abroad. from abroad.
GDP is widely used for
GNP is less used in international
Frequent use international comparisons than
comparisons than GDP.
GNP.
GNP=GDP+ net factor income
Formula GDP=C+I+G+(X-M) abroad
Net National Product (NNP) NNI(NET NATIONAL INCOME)
There happens to be wear and tear of machineries and other
fixed capital during the production process. This is also known
as depreciation or consumption of fixed capital. NNP is the
result of deduction of value of depreciation from the GNP. NNP
allows for the deduction of depreciation, maintenance of fixed
capital and gives the true value of goods and services after
excluding such expenses.
NNP=GNP−Depreciation
National Income
National income is the total income accruing to all factors of production
for the services rendered in the production process. The household
sector provides factors of production in the form of land, labor, capital
and organization in the production of goods and services. They are paid
in the form of rent, wages and salaries, interest, profit, mixed income
etc. for their contribution in the production of goods and services by
supplying the factors of production. The steps which are followed to
arrive at a figure of national income are as follows.
GDP=GDP=W+R+I+P+Depreciation +Net Indirect Taxes
GNP = GDP + Net factor income from abroad
NNP = GNP - Depreciation
NNP at factor cost = NNP - Indirect Taxes = National Income
Personal Income
The total income received by all individuals and households of a
country from all possible sources before payment of direct taxes
during a year is called personal income. There are time when income
is received by a firm but not by the members of the firm. That is why
there is a gap between national income and personal income. All of
the corporate profits do not go to shareholders. A part of it is paid as
tax and some portion of the corporate profit might be retained in the
business. All of the wages and salary accruing to the workers might
not be received. A portion of it is contributed for the provident fund,
pension fund etc. Also, transfer payments accrue to the individuals as
income and are hence included in personal income.
PI = National income - Undistributed corporate profits - Corporate
taxes - social security contribution + transfer payments
Disposable Income
The income left for consumption after paying the direct taxes is
known as disposable income. In other words, it is the income left
for consumption available at people's disposal. However, not all
of the disposable income is used for consumption.
Disposable income = Personal income(Y) - Direct taxes(T)
Per Capita Income
Per Capita Income is the average income of the people of a
country in a particular year. It is the income received by a single
person of a country in that year.
Per Capita Income = National Income in a particular year ÷
Total population in that year
Measurement of national income
• The production of goods and services requires the use of resources which are in
the hands of the household sector of an economy. Households are paid for their
services in the production of goods and services which generates income for the
household. This income stimulates demand for goods and services. The demand
of goods and services from the household sector is satisfied by business firms in
an economy. Hence, household sector spend on goods and services of the firms
which acts as income to the firms. The income they get helps in further
production of goods and services. Hence, there is a circular flow of income.
• Therefore, the national income of a country can be measured using three different
approaches,
1. Product method
2. Income method
3. Expenditure method
• Product method: Product method measures national income by summing up the
market value of all the final goods and services produced in an economy during a certain
period of time. Here, final goods are those goods which are in the market for consumption
by the ultimate consumer. In this method, economy is divided into three sectors, primary
sector (agriculture, forestry, fishing, mining), secondary sector (manufacturing,
construction, electricity, gas, water supply) and tertiary sector (banking, transport,
insurance, trade and commerce) etc. respectively. The money value of total product of
each sector is calculated and summed up to find out GDP. The GDP so derived can be
changed into GNP by adding Net factor income from abroad.
• Final Product Method

• The final product method uses the market value of all the final goods and services to
come to a GDP figure from which national income is deduced.
• GDP = p1q1 + p2q2 + … + pnqn
• GNP = GDP + Net Factor Income From Abroad
• NN P =GNP - Depreciation
• National Income = NNP - Indirect Taxes
Value Added Method

• Unlike final product method, the value added method does not take the
final market value of goods. In the process of production, there are many
stages. Value Added Method only takes the added value in each stage of
production and adds them all to come to a single GDP figure. This method
is used to avoid the problem of double counting. Value addition means the
addition of the value of raw materials and other inputs in the process of
production. Net value added is the difference between the value of output
and intermediate good.
Net value Addition=cost of final output−cost of intermediate good.

In an economy, if we sum up the value addition in the production of all

goods and services, we get the GDP. We can find out the national income
then from the GDP.
GDP=NV1+NV2+…+NVn=∑i

GNP = GDP + Net Factor Income From Abroad

NNP = GNP - Depreciation
NI = NNP - Indirect Taxes
Income Method
The income approach of measuring national income considers all the
payments made to the factors of production to arrive at a national
income figure. Therefore, it is also called the factor payment method.
The household sector provide factors of production like land, labor,
capital and organization to produce goods and services. For this, they
are paid in terms of rent, wages and salaries, interest and profits. If we
sum up all these values we get the GDP of the country.
GDP = Rent + Wages and Salaries+Interest + Profits +
Depreciation + Net indirect taxes
GNP = GDP + Net factor income from abroad
NNP = GNP - Depreciation
NI = NNP - Net Indirect Taxes
Expenditure Method
• Factors of production are paid for their contribution in the production of goods and
services. The income they get can be used in two ways that are consumption expenditure
and investment expenditure. Also, the government spends in the economy. The domestic
economy is also linked with the external sector through imports and exports. The
difference between imports and exports is known as net exports. The expenditure method
measures national income as the aggregate of all the final expenditure on gross domestic
product at market price in an economy during an accounting year.
• GDP = C + I + G + (X - M)
• GNP = GDP + Net Factor Income From Abroad
• NNP = GNP - Depreciation
• NI = NNP - Net Indirect Taxes
• where,
• C= Private Consumption Expenditure
• I= Private Investment Expenditure
• G= Government Expenditure
• X= Exports
• M= Imports
• Difficulties in Measurement of National Income
• Measuring national income is a very important task, because it acts as an indicator of the
performance of an economy over a certain time period. It is useful in international
comparisons as well as time series comparison of the same economy. However, there are
many difficulties in the measurement of national income. Some of the major difficulties are
as follows:
• Double Counting: The problem of double counting occurs because; the same good is
sold and resold many times in the stages of production. Moreover, it is very difficult to
identify which good is final or intermediate. Based upon its use, the same good can
sometimes act as final and sometimes as an intermediate good. Therefore, there is a
chance of overestimation of national income as a result of double counting.
• Method used in the calculation of depreciation: Calculating depreciation is a very
baffling task. This is because different firms use different methods to calculate
depreciation. There is no universal consensus on which method gives an accurate
measurement of the exact wear and tear of fixed capital used in the production of goods
and services. Moreover, there is also a debate whether depreciation should be deducted
from the original cost or replacement cost of the fixed capital.
• Non-marketed goods: All the goods do not come to the market. There are many
household services, value addition to the raw materials in the form of cooking, cleaning,
decorating, babysitting which do not come under the purview of national income.
However, the same activities done elsewhere would have generated income.
• Changes in price level: National income needs two variables for its
calculation, price and quantity of different goods and services produced in
a economy. However, the results can be confusing sometimes. National
income may increase without an increase in production because of
increase in price level.
• Unreported illegal income: Illegal incomes earned through illegal
activities like tax evasion, smuggling, bribery, gambling are not reported
which underestimates national income.
• Large non-monetized sector: Nepalese economy is an agriculture-
dominated economy. In such economy, a considerable amount of
agricultural produce does not come to the market place because the
production is used for self-subsistence. Hence, there exists a large non-
monetized sector, which makes the correct estimation of national income a
tedious task.
• Illiteracy: Most of the farmers do not keep record of their production due
to illiteracy.
• Lack of trained staff: There is a lack of adequate trained statistical staff for
the purpose of measuring national income.
• Narrow Mindset: The people in these countries are
superstitious and hence reluctant to disclose their incomes.
Moreover, people cannot disclose their actual income if it is
earned through illegal sources.
• Lack of occupational specialization: People depend on
various income sources for continuing their livelihood and
hence lack occupational specialization, which makes measuring
national income a difficult task.