National Income Accounting, A theoretical discussion.

NATIONAL INCOME ACCOUNTING
Prepared By: Santosh Acharya
Lecturer of MBS @ JBC
Business Economics-2070/71

CONTENT
1. Meaning of National Income
2. Concept of National Income
3. Measurement of national Income
4. Problems of NI Accounting
9/4/2014 acharyaxantos@gmail.com

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.

According 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 royalties
c) Interest Income
d) Profit including corporation, partnership
or proprietorship; paid out to the owners or
retained in the business, before
deducing taxes based on income.

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)

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.

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 Depreciation
Where, CCA = Capital Consumption Allowance.
 NNP is also known as the National income at
market prices

NATIONAL 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.

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.

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

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.

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.

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.

S.No Expenditure Headings
1. 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

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.

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
- NFIA
GDP

CONCEPTUAL 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

5) 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.

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 Method
2. Value Added Method

1.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.

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.

STEPS
a) 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.)

b) Computation of Gross Value Added:
Gross Value Added = Value of output - Cost of
intermediate goods
= Revenue - Cost

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.

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.

CONT…
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.

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.

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.

THANK YOU

National Income Accounting, A theoretical discussion.

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