This document discusses key concepts related to national income accounting and measuring gross domestic product (GDP). It defines GDP as the total market value of all final goods and services produced within a country in a given period. GDP is measured by summing the value added at each stage of production or considering the final value of sales. GDP has four components: consumption spending, investment spending, government spending, and net exports. There are challenges to accurately measuring GDP, such as double counting, difficulties valuing non-market goods and services, and accounting for changes in quality of life and the environment.

1. Management: Principles, Processes & Practices
© Oxford University Press 2008 All rights reserved
CHAPTER 10
NATIONAL INCOME
ACCOUNTING

2. Management: Principles, Processes & Practices
© Oxford University Press 2008 All rights reserved
Learning Objectives
 The relevance of macroeconomics to business
 Production of output and payments to factors of
production
 Gross Domestic Product (GDP) and its relevance
to business entities
 Techniques used to measure GDP
 Problems associated with measurement of
National Product
 The relationship between GNP, NNP and NI and
DPI

3. Management: Principles, Processes & Practices
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Macroeconomics
 Macroeconomics deals with the behaviour
of economy as a whole such as booms and
recessions, aggregate output of goods and
services, growth in employment and
output, inflation and deflation, balance of
payment, balance of trade, exchange rates,
etc.
 Macroeconomics essentially deals with
interactions among goods and services,
labour and capital markets of the economy
and similar interactions amongst national
economies that interact, with each other.

4. Management: Principles, Processes & Practices
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Concept of GDP
 Gross Domestic Product (GDP), is the total market
value of all final goods and services produced within
a given period, by factors of production located within
a country.
 Final goods and services refer to goods and services
produced for final use. Intermediate goods are goods
produced by one firm to be used as raw materials by
another.
 Value added is the difference between the values of
goods as they leave the stage of production and their
cost when they entered that stage.
 For calculating the GDP, we can either sum up the
value added at each stage of production, or we can
consider final value of sales.

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Measurement of GDP
Aggregate demand or output for the
domestic goods and services is made
up of four components namely
consumption spending by households
(C), investment spending by business
and households (I), government
consumption of goods and services and
gross investment (G) and foreign
demand for our net exports.
Y = C + I + G + (E − I)

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Gross Investment Net
Investment
 Gross investment is defined as the total value of all
newly produced capital goods such as plants,
machinery, equipment, housing, building, and
inventory in a given time period.
 Investments determine the long-term plan of growth
that the economy will adopt.
 It is the demand for capital formation that gets
affected by aggregate demand for goods and
services, prevailing interest rates, taxation system
and structure, and other monetary and fiscal
considerations.
 Capital is subject to wear and tear with usage and
time. It may also become completely obsolete on
account of various factors. The rate of depreciation
depends upon the type of capital and its useful life.
The net investment is the difference between gross
investment and depreciation.

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National Product – Problems of
Measurement
 Double counting - avoid adding the value of all
intermediate goods.
 Second-hand goods already sold once should
not be accounted in the national product
accounts.
 Some outputs are not traded in the market and
thus are not rightly reflected in the GDP. These
include services of a housewife, vegetables,
and fruits produced a kitchen garden, etc.
 Government services are not directly priced by
the market and, therefore, it is not necessary
that a rupee spent by the government is worth
its value.

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 Certain expenses that are added to GDP
represent use of resources to contain or
overcome social evils such as crime or risk to
national economy.
 Quality of Life getting affected on account of
environmental pollution and degradation and
the improvement in the quality of products
such as computers, whose quality and
efficiency are improving while the prices are
falling, resulting in lesser contribution in GDP
for each additional unit produced.
Economists have been trying to overcome these
limitations to arrive at an adjusted GNP.