National Income Accounting

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Introduction

 It is necessary to measure the total output and income

generated in an economy….why?
 Because only then we can make out that whether the
economy is growing or not!
 A increase in real GNP ( a measure of total output in the
economy) indicates economic growth.
Basic Concepts

 GNP ( Gross National Product) at

market prices: Is defined as the
aggregate of market value of final
goods & services produced by an
economy within a period of one year
 Market value: means the price at
which it is sold in the market
 Final goods: those goods that are not
going through any further value
addition and are sold as such in the
market.
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GNP..

 Whereas intermediate goods are those which are used

for resale or for further processing. E.g Cotton is an
intermediate good while shirt made with this cotton is a
final good, fertilizer & wheat?...any guesses?
 Non productive transactions must be excluded from
calculation of GNP.

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GNP
 Non productive transactions are those financial
transactions corresponding to which any productive
activity is not taking place and in these transactions,
money only exchanges hands e.g sale & purchase of
shares & stocks, gifts, old age pensions, unemployment
allowances etc.
 GNP is usually calculated for a period of one year.
 It is a sum total of all goods & services produced by
citizens of an economy, whether within the boundaries
of that country or outside. E.g the incomes earned by
Indian nationals while working abroad will be included
in the calculation of GNP.

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GDP

 It is defined as the market value of aggregate goods &

services produced within the boundaries of a country
during a period of one year.
 GNP at mp – (Net exports or net factor income from
abroad) = GDP at mp.
 Net Exports = Exports – Imports
 Exports means sale of domestically produced products
outside the economy.

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GDP

 On the other hand, Imports are produced outside but

sold within the boundaries of a country.
 If what we receive from abroad is greater than what we
pay abroad , then GNP > GDP

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NNP at market prices

 NNP at mp = GNP at mp – Depreciation

 Depreciation refers to the wear & tear of capital assets.
 In National Income Accounting, depreciation is usually
referred to as Capital Consumption Allowance ( CCA)

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NNP at factor Cost or National Income (NY or
NI or Y)

 National Income at factor cost is the aggregate of all

incomes earned by the factors of production for their
contribution of land, labor, capital & entrepreneurial
ability which go into the year’s net production.
 It is the income that all the factors of production
receive for their services rendered during the year.

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NNP at factor cost or National Income (NY or
NI or Y)

 NNP fc = NNP mp – Indirect taxes +

Subsidies
 NNP mp is the market value of G&S.
However, the whole of this market
value does not get transferred to FOP
in the form of incomes.
 Indirect taxes, which form a part of
the market value of G&S gets
transferred from the seller to the
Govt. and therefore does not form a
part of the factor incomes.
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NNP at factor cost or National Income (NY or
NI or Y)

 Subsidies have to be added to NNP mp because it is a

price which the Govt. pays to the manufacturer to keep
the prices low for consumers.
 Therefore, it forms a part of factor incomes as it is
transferred by manufacturer to the FOP

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Personal Income

 It is the income that is received by the individuals ,

whether earned or un earned.
 So, from the NY, we subs tract those incomes which are
not received by them.
 PI = NY – ( corporate taxes + Corporate retained
earnings/undistributed corporate profits + social
security contributions)+ transfer payments

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Personal Income
 Transfer Payments : These are payments received by individuals for which
they do not have to provide any productive service in return e.g pensions,
scholarships, unemployment allowances etc.

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Disposable Income or Personal
Disposable Income

 It is the income which is received by the individuals & is

at their disposal for spending.
 PDI = PI – direct taxes
 Direct taxes have to be paid compulsorily by individuals,
only the residual income can be spent by them.

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Discretionary Income

 It is defined as the income which the individuals can

spend at their own discretion, i.e at their free will.

 DI = Disposable income – compulsory savings & loan

installments.

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Per Capita Income

 It is defined as the average earnings or income of an

individual in a particular country in a year.

 Per capita income = National Income

Population

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Private Income

 It is the income obtained by individuals from any

source, and the retained income of corporations.
 Private income = NNP f c + TP + interest on public debt
+ corporate retained earnings + savings of Govt.
undertakings.
 OR
 Private Income = PI + corporate taxes+ corporate
retained earnings

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Nominal & Real National Income

 National Income or product calculated at current prices

is called Nominal Income.
 It is the money value of all final G&S measured at
current prices produced by a country during one year.
 However, if there is inflation, the nominal value of
national income will increase even if there is no actual
growth in the output or income.

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Nominal & Real National Income

 So, during inflation the nominal value of NI will be

increasing even when there is no real increase in the
output.
 To overcome this discrepancy and to make the NI data
comparable over time, we calculate NI or GDP or GNP at
constant prices.
 NI at constant prices or at base year’s prices is known as
Real National Income

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Nominal & Real National Income

 To calculate NI at constant prices ,we chose a base

year, which is taken as a benchmark against which all
prices are compared.
 For e.g if we want to compare GNP of 2010 with GNP of
2004, we will calculate GNP of 2010 at 2004’s prices. In
this case 2004 will be the base year!

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Nominal & Real National Income

 The formula to convert the NI at current prices to the

constant prices ( of the base year) is as follows:
NI at constant prices =NI at current
prices * 100

Price Index for current year

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GDP Deflator

 TheGDP deflator is
calculated as follows:

Nominal GDP
GDP deflator =  100
Real GDP
In GDP deflator, we compare the base year price index with
current year price index.
So, GDP of constant prices = Nominal GDP
GDP deflator

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Calculating NI at Constant prices

(Question) NY at current Price Index NY at

Year prices No. (base constant
year 2006 = prices
100)
2006 500 100 500

2007 525 105 ?

2008 570 112 ?

2009 610 120 ?

2010 17-01-2010
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Answers to Question

2007 500
2008 508.93
2009 508.33
2010 523.08

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Methods to Measure National
Income
 Different measurements of national income viz., GNP,
GDP, NNP or NY can be calculated with three different
methods, which are:
 Expenditure or Spending method
 Income method
 Production method

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Spending Approach
 The spending approach divides GDP into four areas:
 households (consumption) (C)
 businesses (investment) (I)
 government (G) and
 foreigners (net exports) (X-IM).

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Spending Approach
 Therefore, GNP = C + I + G + ( X- M)
 C stands for Private Consumption
expenditure. It is the expenditure on
consumer durable goods & single use
goods.
 I stands for Investment expenditure or
“Gross Domestic Private Investment”.
It is the expenditure made by private
enterprises on new investment &
replacement of old capital. There are
two components to it – (i) Fixed
investment, (ii) Change in inventories.
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Spending Method

 G refers to the expenditure that the Govt. incurs on

purchase of goods & services.
 X-M is the net exports or the export surplus

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Income Method

 GNP = Wages & salaries + Rent + Interest+ Dividends +

Undistributed corporate profits + Mixed Incomes +Net
income from abroad
 Mixed Incomes or Composite Income means a
combination of any of the above incomes.

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Mixed Incomes

 EXAMPLE :
 A small grocer has set up his grocery shop in one portion
of his house & has put his own money as capital. He &
his family members work in the same house. In this
case, the total income recd by that grocer consists of
rent, wages, interest & profit. Such types of income are
known as Mixed Incomes

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The production approach

 The production approach looks at GDP from the

standpoint of value added by each input in the
production process.
 The three approaches--spending, income, and
production– (should) result in equivalent values for GDP.

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Production Approach / Value
Added
 While taking the aggregate value of output of G &S for
the whole economy, we must avoid “Double Counting”.
 It can be avoided by taking the value addition for each
stage of production or by taking the final G&S produced.

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Value Addition Method

Stage of Prod. Final Value Value Added

Sale of Wheat 100 100

Sale of flour 150

Sale of Bread 300 150

Sale by 350
Wholeseller
Sale by retailer 400

Bread sold at Rs. ? ?

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Question 1

 GNP = C+I+G+(X-M)
= (1150 – 155) +150+25+125+(-20)
= 1275

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Question 2

 GNP mp = C+I+G+(X-M)
= 50,000+5000+4500+500+(800 – 600)
= 60,200

GNP mp = GDP mp + NFIA

60200 = GDP + 500 = 60,700

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