National Income and Social Accounts

 The Circular Flow of Income

 Concept of National Income
 Measurement of National Income
 Three Approaches to GNP
 Methods of Measuring National Income
Circular Flow of Income
Circular Flow of Income with Saving
Circular Income flow w.r.t Government
Circular flow of Income
 National Income

National Income refers to the income of a nation in one financial year. It is the
total market value of goods and services produced in a nation in a year
 Definition of National Income

 The national income is grouped into 2 groups

1.Marshall, Pigou and Fisher
2. Modern Definition
 Definition of National Income

 The Marshallian Definition : The labour and capital of a country acting on

its natural resources produce annually a certain net aggregate of
commodities , material, and immaterial including services of all kind. This is
known as true National Income, Revenue or National Dividend. Include
income from abroad.
 The Pigouvian Definition: Income that can be measured in terms of money.
National Income is the part of objective income of the community, including of
course derived from abroad which can be measured in money.
 Definition of National Income

 Fishers Definition : Fisher adopted ‘Consumption’ as the criterion of

national income. According to fisher the national income or dividend consist
of solely of services as received by ultimate consumers whether from material
or from human environment.
 Defects in the definition

 Marshallian:
 In todays time there are numerous goods and services produce which is
very difficult to estimate.
 National income cannot be calculated correctly.
 Exists the fear of double counting.
 Defects in the definition

 A.C Pigou:
 There are certain commodity which can and cannot be exchange for
money.
 National income cannot be calculated correctly.
 Fisher:
 Difficult to measure net consumption than net production.
 Consumption of durable goods last for many years.
 Definition of National Income

 Modern Definition : Simon Kuznets has define national income as the net
output of commodities and services flowing during the year from the
country’s productive system in hands of the ultimate consumers.
 Concept of National Income

 Gross Domestic Product (GDP)

GDP is the total value of goods and services produced within the country during
a year.
 GDP factor cost: The sum of net value added by producers within the
country. Since net value added gets distributed as income to the owner of
factors of production.
 Methods to calculate GDP

 The Product method/value added method

 All goods produced in an year of different industries .
 Income method
 The people who receive income in form of wages, salaries, rent ,profit and
interest.
 Expenditure method
 This method focuses on goods and services produce within the country in
that particular year.
 Y=C+I+G+N(X)
 Nominal GDP and Real GDP

 GDP measured on the basis of current price it is called GDP at current price
or nominal GDP.
 GDP calculated based on fixed price it is called GDP at constant price or real
GDP.
 Formula to calculate Nominal GDP and Real
GDP

 According to example purpose

 Nominal GDP = Price * quantity+ Price*Quantity
 Real GDP = Price of base year * quantity+ Price of base year*quantity
 In reality
 Real GDP = GDP / Nominal GDP X Base year index/ Current year index
 GDP Deflator

 GDP Deflator is an index of price changes of goods and services included in

GDP
 GDP Deflator = Nominal GDP/Real GDP*100
 GDP Deflator

 GDP Deflator is an index of price changes of goods and services included in

GDP
 GDP Deflator = Nominal GDP/Real GDP*100
 Identities

 National = Domestic + Net Factor Income from Abroad (NFIA)

 Gross = Net + Depreciation
 Market Price = Factor cost + Net Indirect taxes (NIT)
 Net Factor Income from Abroad = Factor income from abroad – Factor
income to abroad
 Identities

 GDPMP , GDPFC
 NDPMP , NDPFC
 NNPMP, NNPFC
 GNPMP, GNPFC
 Domestic Income: Income which is generated by factors of production within
the country from its own resources.
 Domestic Income = National Income – NIFA
 Private Income : Income obtained by private individual from any source ,
product
 Private Income = NPPFC + Transfer of payments + Interest on public debts-
social Security
 Personal Income: Total Income received by the individuals of a country from
all sources before payment of indirect taxes.
 Personal Income = National Income – Undistributed corporate profits – Profit
taxes - social security contribution + transfer of payment + Interest on public
debts
 Personal Income = Private Income – Undistributed corporate profit - profit
taxes.
 Disposable Income : It is an actual income which can be spent on
consumption by individuals.
 Disposable Income : It is an actual income which can be spent on
consumption by individuals.
 Disposable Income = Personal Income – Direct Taxes
 Disposable Income = National income – Business saving – indirect taxes +
subsidies – direct taxes on persons – direct taxes of business – social security
payments + transfer payment + NFIA
 Real Income : National Income expressed in terms of general level of price of
a particular year taken as base
 Real Income = NNP current year X Base year index/ current year index.
 Per Capita Income : The average income of the people of a country in a
particular year is called Per Capita Income
 Per Capita Income = National Income /population.
 Net Domestic Product (NDP)
NDP is the total value of net output of the economy during a year.
The value of Capital consumption is some percentage of gross investment is
deducted from GDP
 NDP=GDPFC - Depreciation
 Net Domestic Product (NDP)
NDP is the total value of net output of the economy during a year.
The value of Capital consumption is some percentage of gross investment is
deducted from GDP
 NDP=GDPFC - Depreciation
 Gross National Product (GNP)
GNP is the total value of goods and services produced within the country and net
factor income from abroad during a year.
GNP= GDP+NFIA
GNPmarket = GDPmarket price + Net Income from Abroad

GNPfc = GNPmarket price – Indirect taxes + subsidies

 Net National Product (NNP)
NNP is the total value of consumption goods and investment goods.
NNP= GNP - Depreciation
NNPmarket = GNPmarket price - Depreciation

NNPfc = NNPmarket price – Indirect taxes + subsidies

 Net National Product (NNP)
NNP is the total value of consumption goods and investment goods.
NNP= GNP - Depreciation
NNPmarket = GNPmarket price - Depreciation

NNPfc = NNPmarket price – Indirect taxes + subsidies

 Social Accounting

 Social Accounting : The term social accounting was first introduced into
economics by J.R Hicks in 1942. He said social accounting is “nothing else
but the account of whole community or nation”.
 Social Accounting is also known as national income accounting.
 It is thorough understanding of the economic condition.
 It is a method of studying the structure of the body economic
 Components of Social Accounts/ National
Accounts
 The principal forms of economic activity are production , consumption,
capital accumulation, government transaction and transaction with rest of the
world.
 Product Account: This accounts relates to business sector of the economy.
Like manufacturing trading etc.
 It covers both public as well as private companies, proprietary firm and
partnership etc
 Components of Social Accounts/ National
Accounts
 Consumption Account: This accounts refers to the income and expenditure
of the households or personal sector
 The household both public as well as private companies, proprietary firm and
partnership etc.
 Components of Social Accounts/ National
Accounts
 Government Account: This accounts refers to the outflow and inflow of the
government sector . In the govt. account all public authorities like centre,
state and local authorities in a country.
 Capital Account : The capital account shows that savings equals domestic
and foreign investment saving is invested in fixed capital and inventories
within the country.
 Components of Social Accounts/ National
Accounts
 Foreign Account: This accounts shows the transaction of this country with
rest of the world.
 This accounts covers movement of international goods and services and
transfer of payments corresponds to the current account of the interntional
balance of payments.
 Difficulties of Social Accounts/ National
Accounts
 Imputation
 Double Accounting
 Public Service
 Inventory Adjustment
 Depreciation.
 Input and Output Accounting

 This inputs-outputs analysis tells us that there are industries inter-

relationships and inter dependencies.
 The national income accounts are related to final products to measure the
dependencies of industry is not possible.
 Limitations of inputs-outputs

 Constancy of Input coefficient assumption unrealistic

 Factor Substitution
 Rigid Model
 Restrictive Model
 Difficulty in Final Demand
 Quantity of inputs not constant
 Solution of Equation Difficult
 Green Accounting

 What is green accounting system ?

 Objective of green accounting system
 Related to GDP, GNP,NDP,NNP etc
 Importance of Green accounting
 Limitation of Green accounting
 Green Accounting

Green Accounting attempts to place value on Environmental resources that do

not have market price. Both the Index of sustainable economic welfare (ISEW).
Eco-Domestic Product are examples of indicators of sustainable economic well
being.
 The term was first brought into use by the Prof. Peter Woods in 1980s and
India’s former environment minister Mr. Jai Ram Ramesh first time stressed
the need and important to bring green accounting practices to the forefront
accounting in India.
 Objective

 To identify that part of the GDP that reflects the costs necessary to
compensate for negative impact of economic growth, that is, the defensive
expenditure.
 To establish the linkage of Physical Resource with monetary environment
accounts.
 To assessment of environment costs and benefits.
 To accounting for the maintenances of tangible resources.
 To elaborate and measurement of indicators of environmentally adjusted
product and income.
 Relationship with GDP/GNP/NDP/NNP

 Subtracting Environment Cost from GDP it gives us Green GDP.

 Green GDP = GDP – E.C
Similary.
 Green GNP = GNP – E.C
 Green NDP = NDP – E.C
 Green NNP = NNP – E.C
 Importance of Green Accounting

 Changes in the environment have a negative bearing on not just the

environment but on the economy as a whole.
 GDP of a country can be affected by the environment and climatic condition.
 Green accounting is the best tool for the businesses to understand and manage
the potential quid pro quo between traditional economic goals and
environment goals.
 It also help in analysing policy issues specially when those vital pieces of
information are over looked.

 Green Accounting Limitations

 It may be great theoretically but very poor practical.

 Existence of numerous valuation techniques and sustainability indicator.
 Not necessary for certain resources.
 It is long term process therefore to draw conclusion is not easy.