National Income Accounting


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National Income Accounting

  1. 1. The flow of goods and services in a nation over a certain period of time. (usuallyone year)The total money value of all goods and services produced by a nation during oneyear after deducting the depreciation value of the machines used in production.The total payments received by the factors of production through the productionof goods and services in a country in a year.Total net output of the nation.National income of a country is its annual consumption and not units annualproduction.
  2. 2.  Gross Domestic Product (GDP) • Total money value of the all final goods and services produced within a country in a given time period. Gross National Product (GNP) • Total market value of all final goods and services produced by the residents of a country during period of time.
  3. 3.  Market Price and Factor Cost • GDP can be measured at market price and factor cost. • Market price – current price in the market through the forces of demand and supply. (actual price paid by consumers) • Factor cost – real price earned by producer or seller.
  4. 4.  Net National Product (NNP) • The market value of the net output of goods and services produced by nation in a year. • Also referred to as the national income at market prices. National Income at Factor Cost (NI) • The total of all income payments made to factor of production. • Can be derived from NNP.
  5. 5.  Personal Income (PI) • The income that is actually received by individuals and household in an economy in a year. • Deduction made from national income:- (i) Corporate income taxes (ii) Retained earning (iii) Social security contributions (iv) Insurance premium Disposable Personal Income (DPI) • Part of the personal income that is left after the payment of personal direct taxes.
  6. 6. INCOME = PRODUCT = EXPENDITURE3 Approaches : Expenditure Approach Product Approach Income ApproachEXPENDITURE APPROACH Personal Consumption (C) - purchase of good and services produced by firms, individuals or households . Investment - purchase of capital goods by firms for use in production and in changes in the firm inventories . Government Spending (G) - expenditure incurred by federal, state and local government for final good and services . Net Exports ( X-M) - differences between the value of exports and the value of imports .
  7. 7. INCOME APPROACH Wages and Salaries - income received by labour from firm for services rendered to them . Net Interest - differences between total interest payment received and total interest payment made by households . Rental income - payment for rented inputs . Profit - corporate profits earned by business corporations or payment of dividends to shareholders .PRODUCT APPROACH - measured by net value of all final goods and services produced by nation during a year . - OUTPUT APPROACH or VALUE ADDED APPROACH
  8. 8. 3 Sectors Contributing in GDPa) PRIMARY SECTOR : compare Mining and Quarrying, Agriculture, Forestry and Fishing .b) SECONDARY SECTOR : compare Manufacturing and Construction .c) TERTIARY SECTOR : compare Electricity, Gas and Water, Wholesale and Retail Trade, Finance, Insurance, Real Estate and Business Services, Transport, Storage and Communication Government Services and other services .
  9. 9. National Income Accounting = helps to identify sources of income and heads of expenditure.REASONS : Standard of living comparison . Economic performance over time . National planning . Sectoral contribution . Economic policy . Inflationary and deflationary gaps . National expenditure . Public sector . Distribution of income .
  10. 10.  Thecalculation of the national income of a country is not an easy task . National income calculations are complicated and complex . These problems arise due to a lack of a clear grasp of the national income accounting procedures . These are two major problems which will arise when calculating national income . These problems are practical and conceptual in natural .
  11. 11. 1.Problems of non-monetized sectorProblems of a non-monetized sector usually arise inmost third world countries like India , Bangladesh ,Myanmar , Cambodia , Vietnam and Many Africancountries . The existence of a large number of non-monetized activities in these countries especially inthe agriculture sector makes the computation of thenational income more difficult . This sis due to the factthat a large quantity of agricultural output in thesecountries does not reach the market . It is eitherconsumed directly by farmers or exchanged for othergoods and services . This lead to difficulties incalculating the national income .
  12. 12. 2. Problem of illiteracy A large number of small producers in thirdworld countries are illiterate and are unable tokeep accounts of their productive activities .Most of the products that they produce are forself - consumption and not for the market andrecords are not kept productivity activity . Thusthey fail to provide accurate information to thegovernment for the purpose of calculatingnational income .
  13. 13. 3. Problems of expertise The lack of professionals such as statisticians ,researchers , programmers and analysis is amajor problems in third world countries . Theservices of these professionals is very importantin estimating national income data accuratelywith minimum errors .
  14. 14. 4. Problems of less sophisticated machinery Another important difficulty is the non-availabilityof sophisticated machinery such as advancedcomputers or programs to compute nationalincome data . Data collected on national incomeregardless of which method is used , need to beanalyzed using sophisticated machinery .
  15. 15. 5. Problem of double counting Another difficulty is double counting which isusually associated with the product methods .Double counting implies the possibility ofintermediate goods being included in the nationalincome more than once.6. Problem of false informationThis problem arises in developed as well asdeveloping countries . people do not disclosetheir income or underestimate their income toavoid paying higher taxes .
  16. 16. 7. Problems of multi - occupations Another difficulty in calculating national income isthe problem of multi - occupations . People havebeen found to be engaged in a number of economicactivities which are not included in the nationalincome .
  17. 17. REAL INCOME Used to measure the economic growth of a country . Real Gross National Product (GNP) measured on a fixed price or base year . NOMINAL GNP = measured in current prices . Convert Nominal GNP = Real GNP using GNP deflator .PER CAPITA INCOME The average income per head of population . Used as an index change in the standard of living of a country.
  18. 18. GROWTH RATE The percentage change in the quantity of goods and services produced from one year to another .