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National Income Accounting

Rajani Kumar

National Income
Meaning and Definition

The national income statistics is a very important index of the economic development of a country. Its calculated to know:  How much has it changed?  What is the contribution of different sectors to the national income?  How is it distributed among the people?  How is it used for further economic development

National income
Refers to the total money value of the output of all types of goods and services produced and sold in a country during a year and expressed in terms of price. It is the sum total of the money value of all the goods and services produced in a country in one year.It expressed in terms of money.

NI is expressed over a period of time . NI should avoid double counting . National Income : Its Features . NI is a macro economic concept .Net income from abroad is to be . NI is a net aggregate . NI is a flow concept . Value of Government services is added . NI is the money value . NI is a realized flow .

GNP= C+ I+G+(X-M)+(R-P) X=Net value of exports M= Net Value of Imports R= Receipts from abroad in the form of rent. capital goods. Includes the value of consumer goods.wages.interest and dividends P= Payments country make to the foreigners for .GNP (Gross national Product) Is the total market value of all final goods and services produced in a year. net foreign investment and value of government services.

(GDP) Gross domestic product It is defined as the value of all goods and services produced in a year within the geographical boundaries of a country .

Depreciation  It is equal to the gross national product minus depreciation.(NNP)  NNP Net national Product = GNP.  Depreciation is the fall in value of capital due to wear and tear of capital .

NNP at Factor Price NNP at factor Price= NNP – Indirect Taxes+ subsidies .

Accounting Identities at Market price GNP = GNI (Gross National Income) GDP = GNP less net income from abroad NNP = GNP less Depreciation NDP (Net Domestic Product) = NNP less net income from abroad) .

Accounting Identities at Factor Cost GNP = GNP at market price – net indirect ta NNP = NNP at market price less net indirect taxes NDP = NNP at market Price less net income from abroad NDP =NDP at market price less net indirect taxes NDP= GDP at market price less depreciation .

Aggregate output method . Aggregate income Method .Calculating National Income Three Methods: . Aggregate expenditure Method .

Aggregate Output Method 1st calculate GNP -----then arrive at the NNP or Net National Income Important To avoid double counting. hence called value added method .

Consumption of Goods and Services includes the money value of all types of:  consumer goods.GNP or Gross National Income at Market Prices The GNP consists of goods and services Can be classified into four categories: 1. durables/perishable  Services rendered  Rent paid to landlords  Purchases from public enterprises. .

including raw materials new building constructed . Gross Private Domestic Investment: Includes the money value of all types of capital goods. Inventories.2.

Government Purchases • • includes money value of goods and services purchased by the Government total amount of Govt.3. expenditure .

4. . Net Foreign Investment Includes the net difference between the total receipts from and total payment to foreign countries due to export and import of goods and services.

AGGREGATE INCOME METHOD add incomes of all persons and organizations Such as: •Labour incomes (Wages): •Rental Value •Corporation Profits •Net Interest •Mixed type of income •Net income from abroad •Net profits from government Enterprises .

To Exclude: Transfer of payments All unpaid services Investment in share and income received from the sale of the property one owns Direct income taxes .

AGGREGATE EXPENDITURE METHOD estimates the national income with reference to the aggregate expenditure of the country on the consumption goods and investment goods in a given year • Items to be included: •Total Expenditure on consumer goods and services •Total expenditure on capital goods in the private sector •Government Consumption and investment Expenditure •Net factor income from abroad .

DIFFICULTIES IN CALCULATING NATIONAL INCOME •Inadequate and unreliable data •Possibility of double counting •Unclear definition of National Income •Production for self consumption •Instability in value of money •Lack of reliable classification of occupation •Valuation of inventory •Income from illegal activities •Treatment of multinationals •International transactions .

firms (business). government.Circular flow diagram  summarizes the transactions between the different economic agents agents: households. and foreigners (rest of the world)  .

On the other hand. rent. The diagram above represents the transactions between firms and households in a simple economy. the arrow from households to firms represents the payments.1. interest. The arrow emanating from the firms indicates their payments for the use of the factors . n the lower loop.payments for goods and services goods and services FIRMS HOUSEHOLDS factor services factor payments (wages. the arrow originating from the households to the firms shows that firms hire labor and capital from households in order to produce goods and services. In the upper loop. Circular flow diagram. profit) FIGURE 8. the arrow emanating from firms to households represents the sale by firms of goods and services to households.

interest and profit (=GDP) Income (=GDP) Flow of goods & services Flow of money: pesos THE CIRCULAR FLOW DIAGRAM . labor and capital Wages.Revenue (=GDP) MARKETS FOR GOODS AND SERVICES Spending (=GDP) Good and services sold Good and services bought FIRMS HOUSEHOLDS Inputs for Production MARKETS FOR FACTORS OF PRODUCTION Land. rent.

Circular flow diagram    Assumption: The economy composed of households and firms only Households: own factors of production. consume goods and service Firms: hire factors of production to produce goods and services .

Circular flow diagram  Upper loop of the circular flow diagram: transactions in the goods and services markets Lower loop: transactions in the factor markets  .

interest). e. f. b. Government purchases of goods and services. rent.With government and foreign agents  Need to account for : a. . Firms and households pay taxes to government. Taxes paid on income. Transfer payments between different agents. Government payments for factor services (wages. property. c. Transactions with the foreign sector. goods and services. d.

unemployment benefits. and donations. Examples: retirement benefits. . scholarships.Transfer payments   Transfer payments – are transactions wherein one party is not obliged to deliver a good or service in return for the payment.

Transactions with foreign sector    Includes sales of goods and services.goods bought from other countries . and transfers Exports . assets.sales of domestically produced goods to other countries Imports .

e. Philippine peso….. GDP is usually expressed in the currency of a particular country.Measurement of economy’s output: The Gross Domestic Product (GDP)    The GDP measures the market value of all final goods and services produced within an economy in a given period. Transfer payments and transactions involving goods produced in other periods are not included in the calculation of GDP. GDP only measures current production.g.indicates the market value of the goods and services .

GDP   V  P i1 i i1 n n i  Qi .Definition of GDP   The market value of good i (Vi) is equal to PiQi GDP = sum of the market values of all final goods and services produced within the year.

.goods and services that are not purchased for the purpose of producing other goods and services or for resale – Eg.GDP includes final goods and services only  Final goods . Rice (final) and palay or unhusked rice (intermediate product)  Including intermediate goods and final goods will result in “double counting”.

Some Limitations of GDP or GNP as measures of growth     Ignores income distribution Ignores environmental degradation Does not include activities that do not go through the formal markets sectors Does not include “illegal” activities like drug trafficking. moonlighting . prostitution.