4. What is National income?
National income is the income of the nation. Just as a person’s income reflect his economic
status , national income reflects economic status of the country.
All the nations tries to increase their national income and per capita income. The
performance of the economy can be assessed from the rate of growth of its national income
and per capita income.
National income figures summarize the performance of the economy. They are
absolutely necessary for economic policy formulation and planning. That’s why
national income accounting is important.
According to Marshall: “The labour and capital of a country acting on its natural
resources produce annually a certain net aggregate of commodities, material and
immaterial including services of all kinds. This is the true net annual income or revenue of
the country.”
Alfred Marshall
5. What is National income?
National income means the value of goods and services produced by a
country during a financial year. Thus, it is the net result of all economic
activities of any country during a period of one year and is valued in terms of
money. It is the total of factor income i.e. wages, interest, rent, profit,
received by factors of production i.e. labour, capital, and land of a nation.
6. What is National income?
National income accounts summarise the
performance of the economy. It estimates the
value of output, consumption, saving,
investment, exports, imports etc.
Preparation of the national income accounts is
highly useful to the government, business
enterprises, and even common people.
National Income Accounting give us an idea
about the income distribution within the
economy. It shows the sharing of national
income among owners of the factors of
production.
National income statistics indicate the specific
contribution of individual sector and their
growth over time.
National Income Accounts provide the
necessary information for the assessment of
the strength and failures of the economy..
National Income Account help a country to
assess its economic growth and its position
among other countries.
It helps the govt. to estimate the effects of its
policies on the economy.
It gives necessary data for business firm to
evaluate their past performance and design
future activities.
National Income Accounts give us a picture
about the structural change of the economy.
Usefulness of
National
Income
Accounting
7. What is National income?
1. The problem of double counting
2. Non- availability of statistical data
3. Non marketed goods and services
4. Large regional disparities
5. People’s attitude towards official
inquiries
6. Statistical staffs are mostly untrained
and inefficient
1. Transfer of used goods or exchange
of second hand goods.
2. Non-marketed goods and services
3. Income from illegal activities
4. The value of leisure
The Major Limitations of
National Income Estimation
Items Excluded from National
Income Accounting
8. National Income Accounting Measurement
Simon Kuznet first prepared national income figures for the U. S Economy. He got Nobel
Prize in 1971 for the remarkable contributions in the field of National Income Accounting.
Dadabhai Naoroji estimated India’s national income for the first time for the year 1867-68.
He published this estimates in his famous book “Poverty and un-British Rule”. His purpose
was to highlight that the problem of poverty in the country is result of British rule. After
many researchers have estimated India’s national income. Among them, Prof.V.KR.V Rao’s
estimate for the year 1931-32 was the most scientific one. But non of these estimates were
factually correct.
The govt. of India appointed a National Income Committee in1949. Prof. P.C Mahalanobis
was the chairman and D.R Gadgil and Prof. V.K.R.V Rao were the members. The
committee published its first report in 1951 and final report in1954.
Central Statistical Organization estimated India’s national income for the first time in
1956 and published under the title White Paper. Since then, the CSO has been regularly
preparing national income accounts for India and publishing under the title, National
Accounts Statistics
Simon Kuznet Dadabhai Naoroji
P.C Mahalanobis Prof. V.KR.V Rao
9. National Income Accounting Measurement
In India , National Income estimates cover three aspects of income
1.The estimation of domestic product
2. Distribution of domestic product as factor incomes
3.Utilization of Domestic product in the form of final consumption and capital formation
The CSO has divided the Indian economy into 3 main producing sectors such as
Primary, Secondary and Tertiary sectors and 13 sub sectors. The 13 sub sectors are the following
1. Agriculture and Allied activities 8.Trade and Hotels
2.Forestery and Logging 9.Transport and Communication
3.Fishing 10.Banking and insurance
4.Mining and Quarring 11.Real estate
5.Manufacturing 12.Publis administration and defence
6.Construction 13.other services
7.Electricity , gas & Water supply
10. National Income Accounting Measurement
1. In India three methods are used for the estimation of GDP. Among these sectors, Output method is used in the agriculture
and allied activities, forestry and logging, fishing, mining and quarrying and registered manufacturing.
2. Income flow is used in sectors such as Electricity ,gas and water supply, hotel ,communication, banking and insurance
3. Expenditure method is used in the construction sector
11. Value Added method or Product Method
Different steps are involved in the estimation of national income under Value Added Method
1. Identification and Classification of Producing enterprises
2. Estimation of net value added in different sectors
3. Estimation of net factor income earned from abroad
4. Estimation of national income
A. Identification and Classification of Producing enterprises
Identify all the producing units in the economy
All producing enterprises can be classified into broad sectors such as Primary sector, Secondary sector and Tertiary sector
B. Estimation of Net Value Added
In order to estimate net value added, first we have to calculate
1. Value of output( calculated by multiplying the number of units of output produced with their market price i.e P x Q )
2. Cost of intermediate goods (calculate according to the quantities of inputs purchased and prices paid for them )
3. Value of consumption of fixed capital ( estimated based on exiting rules and regulation )
4. Net value added at factor cost (Value of output – cost of intermediate goods – consumption of fixed capital – Net indirect taxes)
Then estimate the sum of net value added at factor cost by all the producing enterprises.
C. Estimate net factor income earned from abroad
= factor income earned by our residents from rest of the world – Factor income earned by non residents in our domestic country
D. Estimate national Income ( NNPFC, adding up net value added at factor cost by all the three sectors and net factors earned income from abroad)
National Income = Net Value Added in the primary
sector + Net Value Added in the secondary sector + Net
Value Added in the tertiary sector + Net Factor Income
from Abroad
12. Income method
In terms of income, national income is the sum of domestic factor income and net factor income earned from abroad. The procedure of estimating national
income in terms of factors income as
A. Estimate domestic factor incomes
B. Estimate net factor income earned from abroad
A. Domestic Factor Income
Income received by factor owners within the domestic territory of a country in return for rendering factor services called domestic factor income.
Factor income generated within the domestic territory of a country are broadly classified in to
1. Compensation of employees : It refers to the payments made by the producers as wages and salaries to their employees, in cash and kind and in respect of
their social security schemes.
2. Operating surplus: It is the sum of factor income ;rent, interest and profit. It is the sum of operating surpluses of all the firms including unincorporated
enterprises. So it is the sum of property income and income from entrepreneurship.
3. Mixed income of the self-employed : This refers to the income of the self employed workers and profits of unincorporated enterprises run by households.
In the next level we have to consider net factor income earned from abroad. Then,
National Income = Compensation of employees + Rent+ Profit + Interest + Net factor income earned from abroad.
13. Expenditure Method
Estimating National income under this methods involves
1. Identify and estimate the components of final expenditure
2. Estimate net indirect tax and consumption of fixed capital at the national level
3. Calculate gross domestic product at market prices by adding all final expenditure
4. Estimate net factor income from abroad
5. Estimate national income
Components of Final Expenditure
The circular flow state that GDP is the sum of expenditure of household, firms and government units. Aggregate expenditure
is classified into four groups.
A. Private consumption expenditure (C)
B. Investment expenditure of firms (I)
C. Government purchase of goods and services (G)
D. Net exports (X-M)
14. A. Private consumption and Expenditure
It refers to the money value of final goods and services purchased by households and non-profit institutions for current use
during an accounting year. It represents demand for goods and services. It is the largest component of total expenditure. Consumption
refers to the using up of goods and services for satisfaction. Consumption of household may be divided into three sub categories of item such
as consumer services, consumer non durable goods and consumer durable goods. Private final consumption expenditure is the sum of
expenditure of households and non-profit institutions on consumer services, durable goods and non-durable goods.
B. Investment Expenditure
Investment is defined as the addition to the existing capital stock during a period. The aggregate value of capital assets added with
existing capital stock by private firms is called Gross Private Domestic Investment. The investment expenditure is divided into four
categories.
1. Business fixed investment
2. inventory investment
3. Residential construction investment
4. Public investment
15. C. Government Expenditure On Goods And Services
Usually government purchase goods and services from private firms as inputs to facilitate its production. In this sense, goods
purchased by the government are intermediate goods. Wages and salaries paid by the governments are other items of government
expenditure. So, government expenditure on goods and services are treated as part of final products. It is important to note that the
expenditure of governments on transfer of payments is not part of GDP. It involves only a transfer of income.
D. Net Exports
Net export means export minus import( X-M). It represents foreign demand for goods and services . A positive net export means export
greater than the import i.e foreigners demand domestic goods. And vice versa.
Trade policies of countries, relative prices of goods, income of the nations, exchange rates etc. are some factors that affect net
exports.
National Income estimated as
GNPmp= Private consumption expenditure+Gross Investment Expenditure+Government purchases of goods and services+Net
exports+Net factor income earned from abroad.
16. Macro Performance – National Income
• Gross Domestic Product (GDP): GDP measures the total monetary value of all goods and services produced within a
country's borders in a specific time period, usually a year or a quarter.
• In India, GDP is a critical indicator used to assess the overall size and growth of the economy.
• It can be categorized into three approaches:
Production Approach: Measures GDP by summing the value-added at each stage of production.
Expenditure Approach: Measures GDP by summing consumption (C), investment (I), government spending (G), and
net exports (exports - imports), which is represented as GDP = C + I + G + (X - M).
Income Approach: Measures GDP by summing all income generated within the economy, including wages, profits,
and taxes.
17. Macro Performance – National Income
• Gross National Product (GNP): GNP takes into account not only the economic activities that occur within a country
but also the income earned by its residents abroad and the income earned by foreigners within the country.
• It provides a broader perspective on the economic well-being of the country's citizens.
• Sectoral Analysis: National income accounting allows for the examination of different sectors of the economy, such as
agriculture, industry, and services.
• This helps in identifying the contributions of each sector to overall economic growth and employment.
18. Macro Performance – National Income
• Per Capita Income: Dividing the national income (GDP or GNP) by the population provides the per capita income,
which is a measure of the average income of individuals in the country.
• It is often used to assess the standard of living and economic development.
• Economic Growth: Changes in GDP or GNP over time are used to measure economic growth. Positive growth
indicates an expanding economy, while negative growth suggests a recession.
• The rate of economic growth in India is a key metric for evaluating the country's development.
• Inflation: National income accounting also helps in tracking inflation by comparing the nominal GDP (current prices)
with the real GDP (constant prices). The difference between the two reflects the inflation rate.
• Balance of Payments: Through the analysis of national income accounts, one can assess the trade balance, current
account balance, and capital account balance, which are crucial for understanding a country's external economic
relationships.
19. National Income - Concepts
• Gross Domestic Product (GDP): GDP measures the total value of all goods and services produced within a country's
borders in a specific period, typically a year or a quarter. It is a key indicator of an economy's size and growth.
• Gross National Product (GNP): GNP includes GDP plus net income earned by a country's residents from abroad and
minus net income earned by foreign residents within the country. GNP reflects the economic well-being of a nation's
citizens.
• Net Domestic Product (NDP): NDP is GDP minus depreciation (wear and tear) on capital assets. It provides a more
accurate measure of an economy's net output after accounting for capital consumption.
• National Income (NI): National income represents the total income earned by individuals and businesses in an
economy, including wages, profits, rents, and interest. It excludes depreciation.
• Personal Income (PI): Personal income is the income received by individuals before taxes and other deductions. It
includes wages, rents, interest, and transfer payments like social security.
20. National Income - Concepts
• Disposable Income (DI): Disposable income is personal income after taxes and other mandatory deductions. It
represents the income available for consumption and savings.
• Real vs. Nominal: Real values adjust for inflation, providing a constant, inflation-adjusted measure of economic
activity. Nominal values are not adjusted for inflation and reflect current market prices.
• Per Capita Income: Per capita income is calculated by dividing national income, GDP, or GNP by the population,
providing an average income per person.
• Aggregate Demand: Aggregate demand is the total spending on goods and services in an economy, comprising
consumption, investment, government spending, and net exports.
• Balance of Payments: The balance of payments accounts for a country's economic transactions with the rest of the
world, including trade in goods and services, financial flows, and transfers.
• Balance of Trade: The balance of trade measures the difference between a country's exports and imports of goods. A
trade surplus occurs when exports exceed imports, while a deficit occurs when imports exceed exports.
21. GNP
• Gross National Product (GNP) is an important economic indicator that measures the total economic output produced by
a country's residents and businesses, both domestically and abroad.
• Definition: GNP is the total monetary value of all goods and services produced by a country's residents, including
individuals and businesses, within its borders and abroad during a specific period, usually a year.
• Components: GNP includes several components, such as:
• Gross Domestic Product (GDP): The economic output within the country's borders.
• Net income earned from abroad: It accounts for the income earned by a country's residents from investments and
work done in foreign countries minus the income earned by foreign residents within the country.
• Calculation: GNP can be calculated using the following formula: GNP = GDP + (Net income earned from abroad)
• Measuring Economic Well-being: GNP reflects the economic well-being of a country's citizens, as it takes into
account the income generated by its residents, regardless of where it was earned.
• International Comparisons: GNP is used to compare the economic performance of different countries. It provides a
broader perspective on an economy's size and the impact of international economic activities.
22. Gross National Product (GNP)
Gross National Product (GNP) is a critical economic indicator that measures the total
economic output of a country's residents, including income earned both domestically
and from foreign sources. It is a valuable tool for assessing economic performance and
making international comparisons.
23. GNP (Gross National Product) and
quality of life
Income and Standard of Living:
GNP reflects the total economic output of a country, which, when distributed among the population, contributes to
income levels.
A higher GNP per capita generally implies a higher average income, which can lead to a higher standard of living for
the citizens.
Economic Growth:
A growing GNP can indicate economic expansion and the potential for increased job opportunities, higher wages, and
improved living conditions.
Economic growth can positively impact the quality of life by providing resources for better infrastructure, healthcare,
and education.
24. GNP (Gross National Product) and
quality of life
• Access to Services:
• A robust GNP can provide the financial resources needed to invest in healthcare, education, and public services,
which are critical components of quality of life.
• Adequate funding for these services can improve health outcomes, educational attainment, and overall well-being.
• Employment:
• A growing economy, as indicated by an increasing GNP, often correlates with low unemployment rates.
• Lower unemployment rates mean more people have access to stable employment, which can enhance their quality
of life by providing financial security.
• Infrastructure and Public Services:
• A higher GNP can fund the development and maintenance of infrastructure and public services like transportation,
utilities, and sanitation, which contribute to an improved quality of life.
• Social Safety Nets:
• A strong economy with a healthy GNP can support social safety nets, such as unemployment benefits and welfare
programs, which help mitigate the negative impact of economic downturns on individuals and families.
25. Measuring the cost of living
• Measuring the cost of living is essential for assessing changes in the general price level and understanding how inflation
affects the purchasing power of a currency. Several key identities and indices are used for this purpose.
Consumer Price Index (CPI):
• The CPI measures the average change in prices paid by consumers for a fixed basket of goods and services over time.
• It is commonly used to gauge inflation's impact on households and is published regularly by government statistical
agencies.
• CPI includes various categories like food, housing, transportation, and healthcare, weighted according to their
importance in the typical consumer's budget.
26. Measuring the cost of living
Inflation Rate:
The inflation rate quantifies the percentage increase in the general price level over a specific period, usually a year.
It is calculated using the CPI or other price indices and is used to monitor changes in the cost of living.
Price Index (PI):
A price index is a measure of the relative price change of a group of goods and services over time.
It can be constructed for various purposes, including assessing cost-of-living changes. The CPI is a type of price
index.
Real vs. Nominal Income:
Real income adjusts nominal (actual) income for inflation, providing a measure of income's purchasing power.
By comparing changes in real and nominal income, individuals can assess how their actual purchasing power has
changed due to inflation.
27. Measuring the cost of living- (Individual)
• Income and Earnings: An individual's or household's income is a fundamental identity in cost-of-living calculations.
This includes salaries, wages, investments, and any other sources of revenue.
• Expenses: Expenses encompass all the costs associated with maintaining a certain standard of living. This includes
housing (rent or mortgage), utilities, transportation (car expenses or public transit costs), groceries, healthcare,
education, and entertainment.
• Inflation Rate: The inflation rate measures the average increase in prices for a basket of goods and services over time.
It's a crucial factor in assessing changes in the cost of living since rising prices can erode purchasing power.
• Geographic Location: The cost of living can vary significantly based on the geographic location. Urban areas tend to
have higher costs than rural areas due to factors like housing demand, property values, and local taxes.
28. Measuring the cost of living- (Individual)
• Household Size: The number of people in a household can impact expenses. Larger families may require more space
and resources, leading to higher costs.
• Economic Conditions: The state of the economy, including factors like employment rates and wage growth, can affect
an individual's ability to meet their cost-of-living needs.
• Savings and Debt: An individual's savings and debt levels are essential to consider. High levels of debt can increase the
cost of living through interest payments, while savings can act as a buffer against unexpected expenses.
• Taxation: The tax environment, including income tax rates and property taxes, can significantly influence the cost of
living in a given area.
• Cultural and Lifestyle Choices: Personal preferences and lifestyle choices, such as dietary habits, entertainment
choices, and travel, can impact an individual's cost of living.
29. Measuring the cost of living from a
country's perspective
• Consumer Price Index (CPI): CPI tracks the average price changes of a basket of goods and services over time. It is a
crucial indicator for monitoring inflation, which directly impacts the cost of living for citizens.
• Gross Domestic Product (GDP): GDP measures a country's economic output. It provides insight into the overall
economic well-being of a nation and its capacity to sustain a certain standard of living.
• Average Income: The average income per capita indicates the average earnings of citizens. A higher average income
generally suggests a higher standard of living but may not reflect income distribution.
• Income Inequality: Metrics like the Gini coefficient measure income inequality within a country. High inequality can
indicate disparities in the cost of living among different segments of the population.
• Poverty Rate: The percentage of the population living below the poverty line helps gauge the affordability of basic
necessities for a significant portion of the population.
30. Measuring the cost of living from a
country's perspective
• Quality of Life: Quality of life factors, such as access to healthcare, education, and public services, can influence the
overall cost of living. These aspects may vary depending on where one lives.
• Household Size: The number of people in a household can impact expenses. Larger families may require more space
and resources, leading to higher costs.
• Economic Conditions: The state of the economy, including factors like employment rates and wage growth, can affect
an individual's ability to meet their cost-of-living needs.
• Savings and Debt: An individual's savings and debt levels are essential to consider. High levels of debt can increase the
cost of living through interest payments, while savings can act as a buffer against unexpected expenses.
• Taxation: The tax environment, including income tax rates and property taxes, can significantly influence the cost of
living in a given area.
• Cultural and Lifestyle Choices: Personal preferences and lifestyle choices, such as dietary habits, entertainment
choices, and travel, can impact an individual's cost of living.
32. Green Accounting - Definition
• In an era marked by growing environmental awareness and concerns about the sustainability of our planet's
resources, traditional economic accounting practices have proven inadequate in capturing the full scope of modern
economic activities.
• Enter green accounting—a groundbreaking approach that recognizes that economic progress must be evaluated not
in isolation but in conjunction with its impact on the environment.
• Green accounting acknowledges that economic growth should not come at the expense of ecological degradation
and that, to make truly informed decisions, businesses, governments, and organizations must account for the
often-hidden environmental costs and benefits associated with their operations.
• This innovative framework offers a pathway toward achieving a harmonious balance between economic prosperity
and environmental preservation, making it an indispensable tool for the sustainable development of our global
society.
33. Definition
• Green Accounting, also known as environmental accounting or sustainable accounting, is
a system of accounting that takes into account the economic, environmental, and social
costs and benefits of business activities. It involves measuring and reporting the impacts
of economic activities on natural resources and the environment.
34. Green Accounting - Objectives
• Integrate environmental costs and benefits into national accounts and decision-making processes.
• Provide a comprehensive view of the true costs and benefits of economic activities by
incorporating environmental and social considerations.
• Promote sustainable development and support the transition towards a green economy.
• Foster stakeholder engagement and participation in environmental decision-making
• Encourage transparency and accountability in the use of natural resources and the management of
environmental impacts.
35. Importance of Green Accounting
Environmental Conservation
Sustainable Decision Making
Resource Management
Long-term Economic Health
Awareness and Education
Policy Formulation
