The document discusses several key concepts in national income accounting: 1) GDP and GNP measure the aggregate output of final goods and services in an economy or produced domestically after accounting for international transactions. 2) Value added method avoids double counting by adding the value contributed at each stage of production. 3) Goods and services are evaluated at market prices to aggregate different types of output. 4) Stock variables measure levels at a point in time, while flow variables measure changes over a period of time like GDP.

1. National Income Accounting
The national income accounting involves computation of aggregate output measures such as
Gross Domestic Product (GDP) and Gross National Product (GNP).
• The gross domestic product of a nation is an aggregate measure of all currently produced final
goods and services evaluated at market prices within the nation’s domestic territory during a
specified period (generally, a quarter or year).
• GNP is GDP plus net factor income from abroad.
• Goods and services are classified into intermediate and final goods. Only the final goods and
services (and not intermediate goods) are a part of GDP.

2. Value added at each stage of production
The value added method computes GDP by adding the value added in the economy. The value
added is defined as value of total production less the value of intermediate inputs used in production.
To avoid the problem of double-counting, value created at each stage may be added. Adding the value
added at each stage will result in total value of the final product.
For example, if we add the value added by wheat farmer, flour miller, bakery, wholesaler and
retailer, we arrive at final value of bread sold. Suppose a loaf of bread is sold at Rs 20. For producing a
loaf of bread, the cost of farmer is Rs 5. The miller and baker add value of Rs 4 each. The wholesaler
and retailer earn Rs 4 and Rs 3 respectively. If we add value added at each stage (5+4+4+4+3) we get
Rs 20, which is the final price of the bread. These values generated at each stage are distributed as
factor incomes to the factor owners.

3. Goods at market prices
It would not be possible to directly compare two entirely different kinds of products or services.
However, GDP measure attempts to incorporate all these different kinds of goods and services
produced in the economy. But it would be difficult to aggregate certain units of apples and certain
number of haircuts. In order to make it feasible to include all these together, goods and services are
evaluated at their market prices. For example, in a hypothetical economy that produces 10 Kilograms
(Kg) of apples and 25 haircuts, it would be difficult to measure the total economic activity. However, if
we multiply these quantities by their prices, the value of these final goods and services can be added
together. Assuming that a Kg of apple costs Rs 20 and each haircut costs Rs 10 the total income can be
computed as 10*20 + 25*10 =200 + 250 = Rs 450.

4. Stocks and Flows
It must be observed that some variables are measured at a point in time while others are measured over
a period of time. For example, savings is measured over a period of time. Higher saving leads to
greater wealth accumulation, which is measured at a point in time. The variables which are measured at
a point of time are stock variables (such as wealth, assets, capital stock etc.) while those that are
measured over a period of time are flow variables (such as GDP, income, expenditure etc.). In this
context, it needs to be clarified that GDP attempts to measure economic activity undertaken in a
particular year in an economy. It does not attempt to measure national wealth or stock of assets a nation
possesses.
Stock Flow
1) Wealth Income, Expenditure
2) Debt Fiscal deficit, Revenue deficit
3) Capital Investment
4) Unemployment Number of persons losing jobs

5. Market price and factor cost: Net indirect taxes
The GDP evaluated at market prices would diverge from the actual payments made to factors of
production (i.e. GDP at factor cost) due to existence of indirect taxes and subsidies. The indirect taxes
imposed on final goods and services increase the market price above the factor cost while subsidies
reduce the market price. In order to derive the actual cost, which represents the true contribution of the
factors net indirect taxes (i.e. indirect taxes minus subsidies) are subtracted from GDP at market price.

6. Value Added Method
In this method, value added of each production unit is added to arrive at the total value of
production. The economy is classified into few broad sectors (agriculture and allied activities,
manufacturing, mining and quarrying, electricity, gas and water supply, construction, services
such as trade, hotels, transport and communication, insurance and other business services). The
value added in each sector is summed to arrive at GDP figures.
Expenditure Method
According to this method, GDP is computed as the sum of consumption expenditure, investment,
government purchases of goods and services and net exports. Writing in equation form,
GDP = C + I + G + (X –M)

7. Consumption expenditure is consumers spending on durable (automobiles, computers etc.) as well
as non-durable consumption goods (drinks, food, clothing etc.) and services (health, transport,
education, haircuts etc.), both on domestic and foreign produce.
Investment includes addition or accumulation of physical capital such as new buildings, business
plants and machinery as well as change in inventories. In case of inventory investment, additions to
stock of inventory are included in GDP as it is a part of current production.

8. Government expenditure includes purchases of goods and services (domestic and foreign) by
government such as defense expenditure, creation and maintenance of infrastructure, salaries of
government employees etc. However, it does not include government expenses on transfer
payments such as social security, pension, medical benefits, unemployment benefits, subsidies and
interest on public debt as these do not represent a demand for currently produced goods and
services.
Net exports or the trade balance is exports minus imports. Exports are currently produced goods
that are purchased by foreigners. Exports add to demand of domestically produced goods. Imports
are purchases of foreign goods made by domestic buyers and should not be counted in GDP.
However, imports are included in C, I and G. Therefore, imports are subtracted to compute GDP.
Net exports are positive if exports are larger than imports and negative if imports are greater than
exports.

9. Income method
GDP is the sum of all factor earnings made from current production of goods and services
including profits earned by producers and taxes paid to government. By this method, GDP is
computed as sum of compensation of employees, corporate profits, proprietor’s income, rental income
of household, current surplus of government sector units and net interest.
Compensation of employees is the income of workers (but excludes self-employed income)
consisting of wages, salaries, other employee benefits and employer’s contribution to pension schemes
and other social security schemes. Corporate profits are residual incomes earned by corporations after
making payment of wages, interest, rents and other cost. These corporate profits are then utilized for
tax, dividend payments and finally kept as retained earnings. The proprietor’s income is the earnings
of unincorporated self-employed. The rental income includes income earned by landowners, royalty
income by authors or artists.