National income accounting is a set of principles and methods used to measure the

income and production of a country.

There are basically two ways of measuring national economic activity:

a) as the money value of the total production of goods and services during a
given period (usually a year).

b) as the total of incomes derived from economic activity after allowance has
been made for capital consumption.

Some of the metrics calculated by using national income accounting include gross
domestic product (GDP), gross national product (GNP) and gross national income
(PI) personal income, disposable income (DI) etc.
National income accounting provides a framework for discussing
macroeconomics. The lines connecting the various sectors of the economy
represent flows of goods and services and of money expenditures (income). The
purpose of National Income Accounting is to obtain some measure of the
performance of the aggregate economy.

Meaning:
National income accounting is the process of counting the value of the flows
between sectors and then summing them to find the total value of the economic
activity in an economy. National income accounting fills in the dollar values in the
circular flow. A term used in economics to refer to the bookkeeping system that
a national government uses to measure the level of the country's economic
activity in a given time period.
1) Measure GDP and GNP:
The reports that come from the national income and
accounting reports tell the leaders of the country about the
GDP, or the Gross Domestic Product. The first part of the
report tells economists how much income people are
making
and how much they have to pay in taxes. The second portion

tells them about how domestic productions are doing.

2) Measures Output of an Entire Economy:
National income accounting measures the output of an
entire economy as well as the flows between sectors. It
summarizes the level of production in an economy over a
specific period of time, typically a year. In practice, the
process estimates the amount of activity that occurs.
3) Fairly Accurate Measures of Economic Activity:
National income accounting generates useful and fairly accurate measures of
economic activity in most countries, especially wealthy industrial countries that

have comprehensive accounting systems.

2) Provides Detailed Information of an Economy :
National income accounting provides economists and statisticians with detailed

information that can be used to track the health of an economy and to forecast

future growth and development. Although national income accounting is not

an exact science,
National income is a fluid concept. National income measures the flow of
production of goods and services in the economy. Goods and services produced in a
given period in the economy are measured by the national income.

Meaning:
National Income is the total net income earned by a country, after deducting its
total expenditure. When the total expenditure is included in the income, it is called
Gross National Income. It means,

Net National Income = Total Income - Total Expenditure

The computation of national income is always done on aggregate basis. So, we can
say that, National Income is the sum of the aggregate income earned by all the
sectors of the country, after deducting their aggregate expenditure.
1) Dr. Marshall :
"With the help of capital, labour and natural resources of the economy, a
certain
net quantity of goods and services, tangible and intangible are produced in the

country. The purpose of using the word, "Net Quantity", that raw materials,
goods in process and depreciation of machinery, is taken into account here.
While calculating the net income, all these expenses have to be deducted from
the gross income and income from foreign investments has to be added to it,
which gives us the net national income".

2) Prof. Pigou :
"The objective social income, which can be measured in terms of money, is
National Income. Obviously, it includes any foreign income too".

3) Prof. Fisher :
"National income means the services enjoyed by the ultimate consumer with the

help of their physical or human resources."

1) Macro Concept :
It is a macro concept as it deals
with the performance of the
entire economy.
2) Flow Concept :
It is a flow concept as it refers to
the flow of goods and services
actually produced in the
economy during the year and not

the stock of goods.

3 ) Time Period :
It is always expressed with the
reference to the time period i.e.
generally a financial year. In India

it is calculated from 1st April to

31st March of every year.
4) Money Value :
It is always expressed in monetary terms. i.e. It represents value of only those
goods and services which are exchanged for money.
5) Fear of Duplication :
There is risk of double counting due to which national income seems inflated. So

the value of final goods and services should be considered. It should avoid
calculation of intermediate goods in National Income Accounting.
6) Depreciation :
It is always referred as net aggregate i.e. allowances should be made for
depreciation in national income calculations.
7) Receipts from Abroad :
It includes income from abroad. i.e. the net value of exports remittances made
by the NRIs, royalties, dividends etc.
8) Ways :
National income is expressed in three ways i.e. National product, National
income, National expenditure.
1) National Income as a
Mirror of the Economy :
Estimates of national
income reflect the
structure of the
economy, importance of
various sectors of the
economy as well as the
share of each sector and
factors of production like
land, labour etc.
2) Understanding the Level of Living :
One can get an idea of the standard of living in a country from statistical data
emerging out of national income calculation. One can get information of per
capita income and disposable income from this data.
3) Knowing Trends of Economic Activity :
National income statistics reveals the annual rate of growth of national income,
trends of consumptions, saving and investment. Similarly, these statistics are
useful in finding out causes of decrease instead of increase in the national
income, growth of production, etc.
4) Helping in Framing Economic Policies :
National Income Accounting reveals trends in the distribution of people's
consumption expenditure, saving and investment. Government can take
measures like evolving schemes to promote popular savings, offer income tax
relief, etc.
5) GNP - Index of Economic Performance :
GNP is the most frequently used national income concept, it is better index than
any other concept of the actual conditions of production and employment in a
country during a specified period.
6) Indicator of Economic Welfare :
The economic welfare of a country, as we know, is closely connected with the
magnitude of its national income. An increase in the national income of a
country,
other things remaining the same, also implies an increase in the economic
welfare of the community.
7) Focus on Importance of Various Sectors :
The national income data throw light on the contributions of the various sectors
of the economy to the gross national product of the country concerned. These
data also reveal the comparative importance of the various sectors in the
national
economy.
8) Provide Information about Consumption, Saving and Investment :
The national income data also throw light on the volume of consumption,
saving and investment in the economy. The level of consumption shows the
level of economic welfare in society, while saving and investment determine
the economic growth of a country.
9) Helpful in Formulating Economic Policies:
All countries whether communist, socialist or capitalist or mixed are
increasingly resorting to planned economic development through five year
plans. Formulation of economic plans is simply not possible without reliable
estimates of national consumption, national saving and national investment.
10)Useful for Research :
The national income data are of great importance for the research scholars
particularly of economics.
The concept of national income occupies an important place in economic theory.
National Income is distributed among the factors of production in the form of rent,
interest, wages and profits.

National income is a Macro Economic aggregate, which is indicative of economic

progress of an economy. There are a number of other related concepts of equal
importance and one should clearly understand the inter-relationship among various
Macro Economic aggregates.

A) Different Aggregates of National Income:

1) GDP = Gross Domestic Product
2) GNP = Gross National Product
3) NNP = Net National Product
4) NDP = Net Domestic Products
B) Market Price and Factor Cost:
1) Market Price :
Market price refers to the actual transacted price and it includes custom
duty, excise duty and other indirect taxes but it excludes government grants

and subsidies.
2) Factor Cost :
actor cost refers to the actual cost of the various factors of production and it

includes government grants and subsidies but it excludes indirect taxes.

C) Relationship between Market Price and Factor Cost :

GNP at factor cost = GNP at market price - indirect taxes + subsidies
GDP at factor cost = GDP at market price - indirect taxes + subsidies
GDP refers to the value of final goods and services produced within the country in a
particular year. GDP is different from GNP. A part of GNP may be produced outside
the country.

a) Territory lying within the political frontiers, including territorial water of the
country,

b) Ships and aircrafts operated by the residents of the country between two or
more
countries,

c) Fishing vessels, oil and natural gas rigs, and floating platform operated by the
residents of the country in the international waters,

d) Embassies consulates and military establishments of the country located abroad.

A) GDP at Constant Prices and Current Prices :
If the domestic product is estimated on the basis of the prevailing prices, it is
called GDP at current prices. On the other hand, if GDP is measured on the basis
of fixed prices also known as base year prices, that are prices prevailing at a point

of time or in some base year, it is known as GDP at constant prices or real gross
domestic product.
B) GDP at Factor Cost and GDP at Market Price :
GDP at factor cost is estimated as the sum of net value added by different
producing units and the consumption of fixed capital. The market value of goods
and services is not the same as the earnings of the factors of production. GDP at
market prices include indirect taxes and exclude the subsidies given by the
government. Therefore, in order to arrive at GDP at factor cost we must subtract
indirect taxes from and add subsidies to GDP at market price. Thus,
GDP(FC) = GDP(MP) - IT. + S.
Where IT = indirect taxes and S = subsidies, FC = Factor Cost MP = Market Price.
In the production of gross national product, during a year, some capital is used up
or consumed i.e. equipment, machinery etc. the capital goods wear out or undergo
depreciation.

Capital goods fall in value due to its use in production process. By deducting the
charges for depreciation from the gross national product, we get the net national
product.

It means the market value of all the final goods and services after providing for
depreciation. It is called national income at market prices.

In other words, net national product is the total value of final goods and services
produced in the country during a year after deducting the depreciation, plus net
income from abroad.
NDP is obtained by subtracting the depreciation from the GDP. NDP differs from
MNP due to the net income from abroad. Thus,
NDP = GDP- Depreciation.

If the net income from abroad is positive, NDP will be less than NNP If the net
income from abroad is negative; NDP will be greater than NNP.

National Income at Market Price and Factor Cost:

NDP is also calculated either at market price or at factor cost. National Income at
Factor Cost means sum total of all income earned by resource suppliers for their
contribution of land, labour, capital and entrepreneurial ability which go into the
years net production. National income at factor cost shows how much it costs
society In terms of economic resources to produce the net output.

National Income at factor cost = Net national product (National Income at

market prices) - (indirect taxes +Subsidies)
GNP is the total market value of all final goods and services produced in a year plus
net income from abroad. GNP is the total amount of current production of final
goods and services. This is the basic social accounting measure of the total output or
aggregate supply of goods and services.

A) Types of Final Goods and Services:

1) Consumer's goods and services to satisfy, the immediate needs and wants of the
people.

2) Gross private domestic investment.

3) Goods and services produced by government and four, net income from abroad
i.e. net export of goods and services.;
B) Symbolic Expression:
GNP = C + I + G + E [E = X - M and (R - P)]
Here,
GNP = Gross National Product
C = Consumption Goods
I = Gross Domestic Private Investment
G = Goods and Services purchased by or produced by the Government.

C) Important Consideration in GNP:

1) Firstly, it measures the market value of annual output or it is a monetary
measure this enables the process of adding up the different types of goods
and
services produced in a year. However, for accuracy, the figure for GNP is
adjusted for price changes.
2) Secondly, for calculating gross national product accurately, all goods and
services produced in any given year must be counted only once. GNP includes

only the market value of final goods and ignores transactions involving
intermediate goods.
D) Calculated of GNP at Market Prices and Factor Cost:
In national income accounting, GNP is calculated both at market prices and
factor cost.
1) GNP at Market Prices:
In order to calculate GNP at market prices, the outputs of all final goods and
services are valued at market price and the values thus obtained are added.
The market price of a good includes indirect taxes such as the sales tax and
excise tax. Thus it is greater than the price received by the seller.
2) GNP at Factor Cost:
GNP at factor cost eliminates the influences of indirect taxes and subsidies.
It
provides an estimate of the total value of the final goods and services
produced during a year at cost of production. GNP at factor cost is obtained

by subtracting net indirect taxes from GNP at market prices.

GNP at Factor cost = GNP at market price - Net indirect taxes = GNP at
market prices - (Total indirect taxes - Subsidies)
Personal income is the sum of the income actually received by individuals or
households during a given year.

Some incomes which are earned such as social security contributions corporate
income taxes and undistributed corporate profits are not actually received by
households In the same manner, some incomes which are received like transfer
payments are not currently earned

For Example: Old age pension, unemployment compensation, relief payments

interest payments etc.

To get personal income from national we must subtract from National income the
three types of incomes which are earned but not received and add incomes that are
not currently earned,

Personal income = N.I - Social Security - contributions - corporate income taxes -

undistributed corporate profit + Transfer Payments.
The personal income which remains after payment of taxes to the government in
the form of income tax, personal property tax etc. is called disposable income.

Disposable income = Personal Income - Personal Taxes. An individual can decide to

consume or save the disposable income as he wishes.
For measuring national income, the economy through which people participate in
economic activities, earn their livelihood, produce goods and services and share the
national products is viewed from three different angles :
Aggregate production of the final goods and services in an economy in any one year
is evaluated in terms of money. The entire output of final goods and services is
multiplied by their respective market prices to find out the gross national product.

Alternatively, the gross national product may be arrived at by adding up the values
imparted to the intermediate goods and services during different processes of
production.

It is also called the Value Added Method. It consists of three stages :

1) Estimating the gross value of domestic output in the various branches of

production;
2) Determining the cost of material and services used and also the depreciation of
physical assets;
3) Deducting these costs and depreciation from gross value to obtain the net value

of domestic output.
A) Measuring Gross Value:
For measuring the gross value of domestic product, output is classified under
various categories and it is computed in two alternative ways:
1) by multiplying the output of each category of sector by their respective
market
price and adding them together, or
2) by collective data about the gross sales and changes in inventories from the
account of the manufacturing enterprises and computing the value of GDP on
the basis thereof. If there are gaps in data, some estimates are made thereof
and gaps are filled.

B) Estimating Cost of Production:

Countries adopting net-product method find some ways and means to calculate

the deductible cost. The costs are estimated either in absolute terms or as an
overall ratio of input to the total output. The general practice in estimating
depreciation is to follow the usual business practice of depreciation accounting.
C) Major Difficulties in Using Net Product Method:
This method is also known as income method and factor-income method. Under this
method, the national income is calculated by adding up all the incomes accruing
production used in producing the national- producing the incomes are grouped
under three categories:
1) Labour Incomes:
Labour incomes included in the national income
have three components:
a) Wages and salaries paid to the residents of
the country including bonus and commission
and social security payments;
b) Supplementary labour income contribution to
social security and employer welfare fund and
direct pension payments to retired employees;
c) Supplementary labour incomes in kind, e.g. free health and
education, food and clothing, and accommodation, etc.
2) Capital Incomes :
According to Studenski, capital incomes include the following capital earnings
a) Dividends excluding inter-corporate dividends;
b) Undistributed before-tax profits of corporations;
c) Interest on bonds, mortgages, and savings deposits (excluding interests on
war bonds, and on consumer-credit)
d) Interest earned by insurance companies and credited to the insurance policy

reserves;
e) Net interest paid out by commercial banks;
f) Net rents from land, building, etc., including imputed net rents on owner-
occupied dwellings;
g) Royalties;
h) Profits of government enterprises.
3) Mixed Income:
Mixed income include earnings from

a) Farming enterprises;
b) Sole proprietorship (not included under profit or capital income)
c) Other professions, e.g., legal and medical practices, consultancy
services, trading and transporting etc. This category also includes the incomes

of those who earn their living through various sources as wages, rent on own

property, interest on own capital, etc.

Major Difficulties in Using Income Method:
The major difficulties in this method are:
Also known as final product method, measures national income at the final
expenditure stages. In estimating the total national expenditure, any of the two
following methods are followed;

1) First, all the money expenditures at market price are computed and added up
together, and

2) Second, the value of all the products finally disposed of are computed and added
up, to arrive at the total national expenditure.
A) Categories of National Expenditure:
Expenditure Approach measures national income by adding the private
consumption expenditure, government consumption expenditure, gross fixed
capital formation i.e. investment expenditure, increase in physical stocks and net
exports of goods and services the difference between exports and imports.
1) Private Consumption Expenditure:
Private consumption expenditure refers
to the final purchases of goods and
services by households. It includes
expenditure on single use consumption
or non-durable goods such as food,
durable goods such as TV, washing
machines, and services such as
hairdressing services and medical services.
2) Government Consumption Expenditure / General Government Expenditure:
Government consumption expenditure refers to the cost of running the
various government departments and public non-profit organizations to
provide goods and services for the public.
3) Gross Domestic Fixed Capital Formation / Investment Expenditure:
Investment expenditure refers to the expenditure on equipments and
machinery, residential and non-residential construction, and changes in
inventories. An increase in inventories is treated as an investment and a fall
in inventories is treated as dis-investment. Resale's of capital goods are
excluded from investment expenditure.
Gross Investment = Net Investment + Replacement Investment
3) Net Exports of Goods and Services:
An export of goods and services refers to goods and services that are
produced in the country but they are sold to foreigners for their
consumption. Imports of goods and services refer to goods and services that

are produced by other countries but they are consumed within the country.
B) Important Considerations Regarding Expenditure Method:

1) Firstly, this sub-head includes capital or investment goods, needed not only to

replace the existing depreciated capital goods, but also the capital goods
required to increase the society's production of goods and services.
2) Secondly, the term 'investment' here means real investment in the Keynesian
sense rather than financial investment. It means the purchase of real
investment goods, such as, buildings, machinery, plant, etc., produced during
the year.
3) Thirdly, 'investment' here does not include mere financial transfer such as, the
purchase of existing stocks and shares on the Stock Exchange. The purchases
of
existing stocks and shares do not represent new investment for purposes of
the national income accounts, since it does not involve any new creation.
C) Treatment of Net Income from Abroad:

Nowadays, most economies are open in the sense that they carry out foreign
trade in goods and services and financial transactions with the rest of the
world.

In the process, some nations get net income through foreign trade while some

lose their income to foreigners.

The net earnings or loss in foreign trade affects the national income. In
measuring the national income, therefore, the net result of external
transactions is adjusted to the total.

Net incomes from abroad are added to, and net losses to the foreigners are
deducted from the total national income arrived at through any of the above
three methods.
National income is a measure of the value of goods and goods produced by the
residents of an economy in a given period of time, usually a quarter or a year.
National income can be real or nominal.
1)Nominal National Income :
Nominal national income refers to the current year production of goods and
services valued at current year prices.
2)Real National Income :
Real national income refers to the current year production of goods and service
valued at base year prices.
The former is obtained when outputs are valued at their corresponding current
prices and the latter is obtained when outputs are valued at their corresponding
constant prices.
n Where:
Nominal Income=  Pi Qi c c

i 1
Pi c  Price of i in the current year
n
Real Income=  Pi bQi c Pi c  Output of good i in the current year
i 1
Pib  Price of goods i in the base year
The calculation of the national income of a

country is a task full of difficulties and

complexities. These are mostly due to the

no or partial availability of detailed and

reliable statistics about the different

sectors of the economy. They may also

arise due to lack of a clear grasp of the

national accounting procedures In the

developed countries of the West.

1) Conceptual Problems :
Conceptual problems relate to definition of various concepts a terminology used

in this process like definition of nation for computing national income method
employed in the national income estimation stage of economic activity at which
national income is to be calculated and the type of commodities and services
which are to be taken into account in national income.
2) Statistical Difficulties:
The available statistics in these countries are not only inadequate but also
unreliable. Farmers are illiterate, have no knowledge about book-keeping so
agricultural data is not reliable and same is seen in many sectors.
3) Presence of Non-monetised Sector:
The existence of a large non-monetised sector in underdeveloped countries also
makes the computation of national income difficult. It is well known, that quite a
substantial part of the agricultural output in the country does not reach the
market at all.
4) Unorganized Sector:
The overwhelming majority of the small producers in the underdeveloped
countries is illiterate and ignorant, and is not in position to keep any account of
their productive activities. So they cannot give to the investigator information
about the quantity or value of their output.
5) Lack of Reliable Information:
There is little of occupational specialization on the part of the people in
underdeveloped countries. Many persons take up more than one activity to earn
their livelihood. It becomes difficult to collect information about their incomes,
etc.
6) Rent Receipts:
Assuming standard rate of rent for agricultural land, pastures, quarries and mines

is not possible in every case, as these rents vary according to different areas and
products.
7) Interest Earnings :
Interest on private borrowings and lendings can only be approximations based on

random surveys and information collected from reliable sources.

8) Wages :
In respect of organized enterprises, data regarding wages and other expenses

must include contribution to PF, Pension, LTAs and so on. In case of projects
undertaken by private and public enterprises, expenses on casual labour cannot

be accurately determined.
9) Smuggling :
Income derived from smuggling never enters, into the books of accounts. As
such, a large parallel economy is not covered for computation of national
income. A large part of the income is not included in notional income
accounting.
10)Capital Flight :
A large proportion of capital from developing countries gets siphoned away
because of capital flights. Thus, while calculating net foreign income, a
substantial amount gets omitted.
11)Error of Double Counting :
To avoid duplication in counting it is necessary that the value of only the final
goods and services are taken into account. In practice it is difficult to determine