NATIONAL INCOME ACCOUNTING

Prepared By: Santosh Acharya

Lecturer of MBS @ JBC

Business Economics-2070/71

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CONTENT1. Meaning of National Income

2. Concept of National Income

3. Measurement of national Income

4. Problems of NI Accounting

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MEANING OF NATIONAL INCOME

national income and product are flow quantities related to a given time dimension. While national product refers to the flows of final goods and services produced during any given period of time. National income represents the flow of total factors of earning available to purchase the net flow of goods and services in the economy during any given time period, generally one year.

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mAccording to G. Ackley, national product is the

economy's total current output of goods and services valued at the market prices they command. National income reconciles of the following heading:

a) Wages, salaries, commissions, bonuses and other forms of employee earning (before deduction of taxes and social security contribution)

b) Net income from rentals and royaltiesc) Interest Incomed) Profit including corporation, partnership

or proprietorship; paid out to the owners or retained in the business, before

deducing taxes based on income.

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CONCEPTS OF NATIONAL INCOME

Gross Domestic Product (GDP):GDP is the total market value of all goods and services produced within a given geographical region, namely country during a given period of time, generally one year. GDP includes the four components viz consumption expenditures (C), investment expenditure, (I) government expenditure (G) and net exports (X – M).

GDP = C + I + G + (X - M)

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GROSS NATIONAL PRODUCT. (GNP).

GNP is the market value of all currently, produced goods and services produced with the domestically owned factors of production during a period of one year.

i.e. GNP = C + I + G + (X - M) + NFIA= GDP + NFIA

where NFIA = Net factor income from abroad.

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NET NATIONAL PRODUCT (NNP)

NNP is the market value of all final goods and services after allowing for capital consumption allowances or depreciation. Mathematically,NNP = GNP - CCA or DepreciationWhere, CCA = Capital Consumption Allowance.

NNP is also known as the National income at market prices

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mNATIONAL INCOME (NI)

National income is that part of NNP which we obtain deducing indirect taxes and summing up the subsides given. NI is also known as the NNP at factor cost.

Mathematically,NI = NNP - Indirect taxes + subsidies

= NNP at factor cost.

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CONT…

NNP at factor cost or national income is the addition of the following components:

i) Wages salaries, commissions, bonus and other forms of employee earning (before deducing of taxes or social security contribution).

ii) Net income from rental and royalties iii) Interest Income iv) Profit, whether of a corporate,

partnership or proprietorship whether paid out to owners or retained in the business, and before deduction of taxes based on income.

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PERSONAL INCOME: (PI)

This is the sum of all income actually received by all individuals or households during a given year.

i.e. P.I = National income - Social security contribution- Corporate Income Tax- Undistributed profits+ Transfer payment+ Interest on public Debt

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DISPOSABLE INCOME (DI)

The income which remains after subtracting direct taxes from personal income is called disposable income.

Thus, Disposable Income i.e. DI = Personal Income - Direct Taxes.

OR

DI = Consumption + Saving.

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MEASUREMENT OF NATIONAL INCOME ACCOUNTS

Measurement of National Income has been done by three methods viz.

a).Expenditure b).Income, and c).Product Approach.

All three approaches give the identical measurement of the amount of current economic activities.

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A) EXPENDITURE METHOD

This method is from the side of expenditures.

Hence the personal consumption expenditure(C), the gross private domestic investment as well as the foreign investment (I), the government purchase of goods and services (G) and net export are added to obtain GDP.

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S.No Expenditure Headings1. Personal Consumption Expenditure (c)

i) Durables

ii) Non-Durables

iii) Services

2. Gross Domestic Private Investment (I)

i) Business fixed investment

Non- residential structures

Producer's Durable equipments

i) Residential Investment

ii) Inventory Investment

3. Government Purchase of Goods and Services (G)

4. Net Export (X - M)

i) Exports (X)

ii) Imports (M)

GDP = C + I + G + (X - M) + NFIA

= GNP – Depreciation or CCA

= NNP – Indirect Taxes + Subsidies

= National Income or NNP at factor cost

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B) INCOME APPROACH

According to this approach, the factor earning of the economy is the sum total of rent, wages, interest and profit. The incomes are earned there from property or through work. It can be presented on the following table.

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S.N. Headings

1. Compensation of Employees

2. Proprietor's Income

3. Rental Income of Persons

4 Corporate Profits

5. Net Interest

= NNP at factor cost or National Income + Indirect Taxes - Subsides= NNP+ CCA or Depreciation= GNP- NFIAGDP

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mCONCEPTUAL CLARITY

1) Compensation of Employee: Wages and salaries paid by the government and business to the supplier of labor.

2) Proprietor's Income: Income of non incorporated self-employed are included.

3) Rental Income: It includes the rent of land, other rented proprietor, income and the estimated rent of all such assets are used by the owner themselves.

4) Corporate Profits: Corporate profits represent the remainder on corporate income after wages, interest and other costs have been paid

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m5) Net Interest: which is paid out by the business sector.

6) National Income: National income is the summing up of all the above five category.

7) Indirect Taxes: Those taxes imposed by government are called as indirect taxes whose burden is shifted to the other people.

8) Subsidies: Financial support given by the government to the private firms and owned enterprises.

9) Depreciation: Depreciation is known as the consumption unit of fixed assets or capital. Due to the continuous use of capital assets it tears out, so we deduce same amount from its initial value.

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C. PRODUCT APPROACH:

By this method, total product of the economy are calculated for the year, and the value of this how is equated to the market price.

Under the product approach there are two approaches to estimate the national income

1. Final Product Method2. Value Added Method

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m1.FINAL PRODUCT METHOD

Final Product Method is that one, that is produced and sold for consumption and investment GDP excludes the intermediate goods that are used to produce other goods. According to this approach, GDP is estimated by finding the market value of final goods and services produced in an economy during a period of one year.

Steps a) GDP at Market Price = Market values of all

Final goods and services b) GNP at Marked Price = GDP at Market Price

+ NFIA c) NNP at Market price = GNP at Market Price -

Depreciation or CCA d) National Income or NNP at factor cost = NNP

at Market Price - indirect taxes + subsidies.

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2. VALUE ADDED METHODS:

In this method the value added at the different stages of production is counted for calculating NI. Value added is the difference between the value of materials output and inputs at each stage of production.

Value Added = Sales Value of Output - Cost of Intermediate Goods = Sales - Cost

When we add such difference of all the industries in the economy. We get the GDP of a nation.

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STEPSa) Industrial classification:This method divides all producing sector in the

economy into three category, according to their activities they perform. They are

i) Primary Sector (Agriculture called activities)ii) Secondary Sector (Manufacturing, Construction

electricity etc.)iii) Tertiary Sector (Banking Transport, Insurance

etc.)

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b) Computation of Gross Value Added:

Gross Value Added = Value of output - Cost of intermediate goods

= Revenue - Cost

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c) Calculation of GDP:

GDP is the sum of gross value added of all sectors including classified above sectors, gives GDP at factor cost.

GDP at factor cost = Sum of all gross value added of all sectors

GNP at factor cost = GDP at factor cost + NFIA.

NNP at factor cost or National Income = GNP at factor cost - Depreciation or CCA.

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PROBLEMS OF NI ACCOUNTING

A. Conceptual Problems

i) National income is always measured in terms of money but there are so many goods and services that cannot be measured in term of money. Eg. painting as a hobby, bringing up of children etc.

ii) problem of double counting arises while counting

national income which arises from the failure of to distinguish properly between a final and intermediate product, flour is intermediate product for bakery but final to the household.

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mCONT…

iii) National income account includes only those goods and services produced by using legal activities but in reality there may have various activities of production that has been doing illegal activities. Thus, accounting national income may reduce the size of the economy.

iv) Capital gains or losses which accrue to property owners by increasing or decreasing in the market value of their capital assets or changes in demand are excluded from the GNP because such changes do not result from current economic activities.

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B. Statistical Difficulties

i. Accurate and reliable data are not adequate, as far as output in the subsistence sector is not completely informed. Small scale and cottage industries also do not report their targets. Indigenous bankers do not furnish reliable data and so on.

ii. Due to the large regional diversities they have different culture , customs, languages etc. also create the problems in computing the national income. People elsewhere do not cooperate to collect data that is needed for NI measurement.

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CONT..

iii. Data should be complied collecting from the different sector of the nation. Compiled data may not give the actual result and moreover in developing nations untrained and undertrained staff are still in the bureau of statistics which is also another hindrance of NI measurement.

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THANK YOU