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National income accounting

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  • 1.
    • Gross National Product
    • Definition : Total market value of all goods and services produced in any given
    • year. GNP includes only currently produced goods and services in a year.
    • Components
    • Value of final consumer goods and services produced in a year and consumed
    • by the household which is referred to as consumption by households.
    • Value of new capital goods produced and addition to the inventories of goods in a
    • year such as raw materials, unfinished goods and consumer goods produced but
    • not sold.( Gross Private Investment)
    • Purchase of goods and services by the government denoted by G.
    • Net Exports i.e X n = X-M.
    • Net Factor income from abroad.
    • GDP mp = GNP mp – Net factor Income From Abroad
    • GNP mp = GDP mp + Net Factor Income From Abroad
  • 2. Methods of Estimation of GNP
    • Expenditure or Output approach to GNP : Nation’s total expenditure on goods and services produced during the year. Thus its constituents are following
    • Personal Consumption Expenditure
    • Includes Durable as well as Non durable goods and services produced during the year. Purchase of house not included.
    • Gross Domestic Private Investment
    • Includes Private Investment in capital goods such as buildings,machineries,plant equipment etc.,expenditure on purchase of house and net addition to business inventories.
    • Government’s purchase of goods and Services
    • Includes purchase of market consumer goods such as paper, stationary etc., Investment goods and services.
    • Net Foreign Investment.
    • Exports are included and value of imports is deducted.
  • 3. 2. Income or allocation approach to GNP
    • Wage and salaries of employees during the year plus certain supplements.
    • Income of non company businesses such as proprietors, partners and self employed persons.
    • Rental Incomes earned by individuals on agricultural and non agricultural property.
    • Corporate profits plus Corporate profits taxes plus dividends paid to the shareholder.
    • Net interest earned by the individuals
    • Indirect taxes
    • Depreciation of capital goods
  • 4. Net National Product
    • NNP= GNP- Depreciation
    • Known as National Income at market prices
    • Better index than GNP as depreciation is not included in NNP
    • Gives an idea of net increase in production.
    • Helpful in analysis of long run problem of maintaining physical supply of goods.
    • Highly useful concept for the study of growth economics.
    • However fixation of depreciation charges is an issue.
  • 5. National Income
    • Known as National Income at Factor cost.
    • It is the total of all incomes payments received by the factors of production i.e. land, labour and capital.
    • National Income = Net national product-Indirect taxes + subsidies- profits accruing to the government.
    • It helps us to know the distribution side of the national output that is how the national output is distributed among the various factors of production.
  • 6. Personal Income
    • It is that income which is actually received by the individuals or households in a country during the year from all sources.
    • Personal Income = National income – Corporate Income Taxes – Undistributed Corporate Profits – Social Contributions + Transfer Payments
    • It is a useful tool for estimating the potential purchasing power of the households in an economy.
    • It helps to measure the general welfare of the people in the country.
    • However, it does not tells us the actual amount of money available to the households for spending and saving.
  • 7. Disposable Personal Income
    • That part of personal income which is left behind after payment of personal direct taxes is called disposable personal income.
    • Disposoable Personal Income=Personal Income – Personal direct Taxes.
    • Disposoable Personal Income = Consumption + Saving.
    • Money burden of Personal direct taxation can be find out with the help of personal income
  • 8. Difficulties in calculation of National Income
    • Statistics inadequate and unreliable
    • Large non-monetized sector in underdeveloped economies.
    • Majority of small producers in underdeveloped countries are illiterate and ignorant.
    • Occupational specialization is not there in these countries.
  • 9. Importance of National Income
    • Gives the idea of aggregate production in the country.
    • Increasing national Income is an indicator of economic progress.
    • Economic welfare is closely connected with the magnitude of National income
    • Contribution from various sectors can be known.
    • Gives a picture about distribution of income among the various sections.
    • Volume of consumption, savings and investment in the country.
    • Formulation of economic policies and planning.
  • 10. Relation between Economic Welfare and National Income
    • The effect of National income on economic welfare an be studied in two ways
    • The change in the size of National Income: Positive change in NI increases its volume, as a result people consume more of goods and services, which leads to increase in economic welfare and vice versa. This relationship depends on various factors.
    • Only real increase in national income increases economic welfare.
    • NI cannot be a reliable index if per capita income is not taken into account.
    • Sometimes even with increase in NI and Per capita income economic welfare decreases due to unequal distribution of economic wealth.
    • Influence of increase in National Income on economic welfare also depends on the spending habit of the consumers.
    • The change in distribution of National Income
    • Change can be from rich to poor and from poor to rich and economic welfare is said to increase when former situation is implemented.