Topic

“NATIONAL INCOME ACCOUNTING”

by
DIPANGSHU DEV CHOWDHURY
Concept : Real and nominal income why?
Rs Y= Nominal Income
Rs P = Market price
Nominal income
Real Income= 𝐴 =
𝐏𝐫𝐢𝐜𝐞 𝐥𝐞𝐯𝐞𝐥

Nominal income Price level Purchasing power

Rs 10000 Rs 100 100 units
Rs 20000 Rs 150 133 units (approx)

Rs 30000 Rs 500 60 units

Rs 40000 Rs 700 57 (approx)
Gross Domestic Product (GDP) vs. Gross National Product (GNP)
Gross Domestic Product(GDP)
An estimated value of the
total worth of a country’s
production and services,
within its boundary, by its
nationals and foreigners,
calculated over the course on
one year
GDP = consumption + investment +
(government spending) + (exports −
imports).
Total value of products &
Services produced within the
territorial boundary of a
country.
Gross National Product
An estimated value of the total
worth of production and
services, by citizens of a
country, on its land or on
foreign land, calculated over
the course on one year.
GNP = GDP + NR (Net income inflow
from assets abroad or Net Income
Receipts) - NP (Net payment outflow
to foreign assets).
Total value of Goods and
Services produced by all
nationals of a country (whether
within or outside the country).
 Market price and Factor cost approach
 Market price:
NNP at MP = total output × market/consumer price

 Factor cost:
Goods produced are sold at market prices which include
the indirect taxes imposed by the Government. Indirect
taxes are levied on commodities, such as excise on cloth
etc. the market value of the national product exceeds the
income paid to the factors of production by the amount of
indirect taxes. Hence, net national income at factor cost
shows the income actually received by the factors of
production.
(NNP at MP – Indirect Taxes) = Net National Income at
Factor Cost
GDP at market price GDP at factor cost
GNP at market price GNP at factor cost
NDP at market price NDP at factor cost
NNP at market price NNP at factor cost
Gross= Net + Depreciation
Real and Nominal GNP
The difference between real and nominal GNP, or gross
national product, is that the nominal GNP is calculated at the
current price levels of the economy, and the real GNP is
calculated relative to a set base year. Nominal GNP is typically
used to compare current economies at current price levels, and
real GNP can be used to evaluate a single economy's history.
Nominal GDP is GDP evaluated at current market prices.
Therefore, nominal GDP will include all of the changes in market
prices that have occurred during the current year due to inflation
or deflation. Inflation is defined as a rise in the overall price level,
and deflation is defined as a fall in the overall price level. In order
to abstract from changes in the overall price level, another
measure of GDP called real GDP is often used. Real GDP is GDP
evaluated at the market prices of some base year.

If prices rise, then the nominal GNP will look like it increases even
if it doesn't actually increase. This is because the total output in
price will increase. Real GNP, therefore, can help adjust for
inflation and rising costs while still providing an accurate measure
of the total economic output. Real GNP can be used for measuring
economic output in terms of goods and services, while nominal
GNP can be used to measure output in terms of money value.
 base year price
GDP(real) = GDP(nominal) x
current year price
1. Base year value is = 100

Current year price value = 109 Current year price value = 95

GDP(real) < GDP(nominal) GDP(real) > GDP(nominal)

Inflation Deflation
Consumer price index. The GDP deflator is not the
only index measure of the price level. Among the
many other price indices, the consumer price index
(CPI) is the most frequently cited. The CPI differs
from the GDP deflator in two important ways. First,
the CPI measures only the change in the prices of a
“basket” of goods consumed by a typical
household. Second, the CPI uses base year
quantities rather than current year quantities in
calculating the price level index value. The formula
for the CPI is given as
Example,
if 1990 were chosen as the base year, then real GDP for
1995 is calculated by taking the quantities of all goods
and services purchased in 1995 and multiplying them by
their 1990 prices.
GDP deflator. Using the statistics on real GDP and
nominal GDP, one can calculate an implicit index of the
price level for the year. This index is called the GDP
deflator and is given by the formula

The GDP deflator can be viewed as a conversion factor that

transforms real GDP into nominal GDP. Note that in the base
year, real GDP is by definition equal to nominal GDP so that the
GDP deflator in the base year is always equal to 100.
Calculating the rate of inflation or deflation. Suppose that in the year following
the base year, the GDP deflator is equal to 110. The percentage change in the
GDP deflator from the previous (base) year is obtained using the same formula
used to calculate the growth rate of GDP. This percentage change is found to be

implying that the GDP deflator index has increased 10%. Another way of describing
this finding would be to say that the inflation rate in the year following the base
year was 10%. More generally, if the percentage change in the GDP deflator over
some period is a positive X%, then the rate of inflation over the same period is
X%. If the percentage change in the GDP deflator over some period is a negative
X%, then the rate of deflation over that period is X%.
The CPI value for the base year is always equal to 100. In this case,

Thus, the percentage change in the current year CPI from the base year CPI is

In other, words, the rate of inflation in the current year is 3.67%