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Vivekananda College,: Thakurpukur Kolkata-700063

National income accounting is used in macroeconomics to understand where an economy stands currently. It involves measuring the total income of a country, known as national income. National income can be measured using the income method, expenditure method, or value added method to avoid double counting. Key concepts include GDP, GNP, NNP, NDP and identities such as consumption + savings = national income and consumption + investment + government spending + net exports = national income.

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222 views26 pages

Vivekananda College,: Thakurpukur Kolkata-700063

National income accounting is used in macroeconomics to understand where an economy stands currently. It involves measuring the total income of a country, known as national income. National income can be measured using the income method, expenditure method, or value added method to avoid double counting. Key concepts include GDP, GNP, NNP, NDP and identities such as consumption + savings = national income and consumption + investment + government spending + net exports = national income.

Uploaded by

Paramartha Banerjee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Vivekananda College,

Thakurpukur
Kolkata-700063
NAAC ACCREDITED ‘A’ GRADE

Topic: National Income Accounting


Course Title: ECOA-CC-2-3-TH
Paper: III
Unit: 1
Semester: II
Name of the Teacher: Dr. Atanu Thakur
Name of the Department: Economics
UNIT—1: National Income Accounting
• Why this is required in Macroeconomics
• Answer: Actually in Macroeconomics our one major goal is to find out
the policy or policies through which the country can develop. Now to
do this we have to know where we are? This unit will tell us where we
are?
• If I say that Prof. Thakur is a person of upper middle class then how I
come to this conclusion.
• I have come to this conclusion because I know the income of a
Professor (without tuition income as Prof Thakur is not giving pvt
tuition). So ‘income’ is the key word.
So for a country…
• It is income of a country which tells you where the country is now.
• And income of country=National Income
• National income is a big term it involves two terms: 1) National and
2)Income
• So to understand this big term we have to go through this topic.
• So we start with a very simple economy with one Household and one
firm
• One Household supplying labour, one firm producing Bread
Circular flow
LABOUR

Consumption Expd Firm


Household
Bread

WAGE
National Income in Simple Economy
• So here National income is Wage which is the income of the
Household
• The total output (GDP, will explain later) is the value of bread which
we can get from the Consumption expenditure.
• Now we introduce two things:
• First we assume that the House will save a certain percentage of
income and consume the rest.
• The firm also gets some investment also.
Circular flow
LABOUR

Consumption Expd Firm


Household
Bread

WAGE

Bank
SAVINGS INVESTMENT
So What is National Income?
• The National Income is sum of Consumption Expenditure and Savings
• Or we can get the income by adding up Consumption expenditure
and Investment.
• Now we introduce Government.
• Government will collect tax which Govt’s income and govt will spend
this for welfare activity.
Circular flow
LABOUR

Consumption Expd Firm


Household
Bread

WAGE

Bank
SAVINGS INVESTMENT

TAX GOVT
PURCHASE
Govt
Circular Flow of Income
• So Household is supplying labour to Firm
• Firm is paying wage to them, this is one loop.
• Another loop is Firm gives HH bread, the payment HH is making is the
Consumption Expenditure.
• With this HH is also savings some out of their income which in turn
used as Investment for the Firm
• HH is also paying Tax to the Government which Govt uses it to
purchase ventilator
• Now I think we understand the circular flow of income.
GNP & GDP
• GNP: The value of all final goods and services produced by domestically
owned factors of production at home or abroad in the current year.
• Now think that an American Consultant is working in IBM at Bangalore
center and an India is professor in an US university.
• The income of American Consultant will not be a part of Indian GNP but
the income of Indian Professor will be included in India GNP.
• GDP: The value of all final goods and services produced in the current year
within the geographic boundary of a country.
• GNP=GDP+ Income of India residing abroad – income of foreign nationals
NNP & NDP
• All capitals wear out in the course of production. This is termed as
Depreciation or Cost of Capital. This is set aside to maintain the stock
of capital at its present position.
• NNP = GNP – Depreciation
• NDP = GDP – Depreciation
• Now all the above variables are evaluated at market price.
• Remember the Circular flow of Income again. The firm produce goods
and services and sell it. With this revenue they are paying the factors
of production, indirect business tax (IBT) and they are getting sunsidy.
Contd……
• So we can write:
• GDP = sum of all payments to factors + IBT – Subsidies
= ∑ Wages + ∑ Rent + ∑Interest + ∑Profit + IBT – SUB
∑ Wages + ∑ Rent + ∑Interest + ∑Profit = GDP – IBT + SUB

GDP at factor cost


or
National Income (NI) at factor cost
Now the task is to measure it.
But HOW??????
Measuring NI
• There are three methods:
• 1. Income Method
• 2. Expenditure Method
• 3. Value Added Method
• Income Method
Here we sum all the factors payment or income of all factors of
production. That mean we have to add Wages & Salaries, Rent, Interest
and Profit.
Income Method
• So in very simple closed economy without Government (Recall the
Circular Flow of Income) the HH income which is actually NI is equal
to Consumption (C) + Savings (S),
• Now if we introduce govt here the what is the income of Govt.: Tax
• So NI (Y) = C + S + Tax
• But Govt also transfer (Tr) some money to different welfare activities
like pension
• So Y = C + S + Ta-Tr or Y = C+S+NT (NT = Net Tax)
• Now if we open the economy then another component of income will
come: Net income from Abroad (Rf) so Y = C+S+NT+Rf
Expenditure Method
• To get the value of final goods and services here we try to sum all the
expenditure made by people and govt.
• But the number of individual buyers are so vast that it is near
impossible to get the data.
• So output is grouped into three major categories: Consumption
Output, Investment output and output for Govt purchase.
• Now if economy is closed means no export and import then the value
of GDP or NI is given by:
•Y=C+I+G
Expenditure Method
• But if the economy is open then there export as import.
• The output which is exported is produced here but not marketed
within the economy.
• On the other imported goods are not produced here but marketed
here.
• So every expenditure has two components: expenditure on
Domestically produced goods and expenditure on imported goods.
• C = Cd + Cm where Cd = Expd on domestically produced goods and
• Cm = Expd on Imported Goods
Contd…..
• Similarly I = Id + Im and G= Gd + Gm
• So GDP = Cd + Id + Gd + X ; X= Export
• GDP = C – Cm + I – Im + G – Gm + X
• = C +I +G + X – (Cm +Im + Gm )
•
• total Import (M)

• So GDP (Y) = C + I + G + (X – M)
The problem of Double Counting
• The problem of double counting is a major problem for both the
above two processes.
• In case of expenditure method the problem of double counting arises
because sometimes it is very difficult to differentiate between final
and intermediate goods
• In case of income method the problem arises due to problem of
differentiating between income and non-income.
• Value Added Method is used for overcoming this problem
Value Added Method
• Under this method the Value Added by all the production units
(including those producing intermediate goods and services) are
summed up to arrive at the value of final production.
• Rs 0 Rs. 100 Rs. 250 Rs. 450
• Wood Prod wood table Final Table
• Firm A Rs.100 Firm B Rs. 150 Firm C Rs.200 Firm D Rs.200

• Conm
• Rs. 650
Here GDP = Rs. 650
Interpretation of VA from Income Side
• Start with single firm.
• VA = TR – CII Where TR= Total Revenue & CII= Cost of Intermediate Inputs
• Now Profit of the Firm ∏ = TR – TC ; TC = Total Cost
• Now TC = CII + Payments to the Factors of Production
• = CII + Wage Bill (W) + Rent Bill (T) + Interest Bill (K)
• W = wL ; T = rt; K = iK ; w=wage rate, L=Labour employed; r=rent for Land, t=
amount of Land used; i = interest rate; K= Amount of Capital used
• ∏= TR – CII – (W+T+K) => VA = W + T + K + ∏
• So for n no. of firms ∑VAi = ∑Wi + ∑ Ti + ∑Ki + ∑∏i
Some Identities
• In Case of Simple closed economy without govt.
•Y≡C+S
•Y≡C+I
•C+I≡Y≡C+S
•I≡Y–C≡S
• That is the Saving-Investment Identity.
• Now we introduce Government and Foreign Trade.
Some identities
• Y ≡ C + I + G + NX
• A part of NI is spent on taxes (TA) and the private sector also gets
some payment as Transfer (TR) (will detail out all these later) and that
gives the Disposable Income (YD):
• YD ≡Y+ TR – TA
• Example: Suppose I earn Rs. 100 as wage, I pay taxes of Rs. 10 and I
get some transfer payment from my friend of Rs. 20. So
• Y = 100 and YD = 100 + 20 – 10 = 110
• YD = C+S
Contd……
• YD –TR +TA ≡ C + I + G + NX
• C + S –TR + TA ≡ C + I+ G +NX
• S – I ≡ (G + TR – TA) + NX Trade Deficit/Trade Surplus

Govt Budget Deficit


(G + TR) is Govt Spending and TA is Govt Income
Now if (G+TR) > TA => Budget Deficit
< => Budget Surplus
If S = I the Budget Deficit (Surplus) = Trade Surplus (Deficit)
Summary of NI Identities
• GNP at market price – Capital Consumption Allowance (Depreciation) = NNP at
market price
• NNP at market – Indirect Business Tax (IBT) + Subsidy = NI
• NI = Wages & Salaries + Proprietor’s income + Rental Income of Persons +
Corporate Profit + Net Interest
• Rental Income of Persons: Imputed income of owner-occupied houses
• Net Interest: Interest paid by domestic business and rest of the world to domestic
individuals and firms – interest paid by household to business and household &
firms to the rest of the world.
• Corporate Profit (Corp ∏) – Corporate profit tax = After tax corporate profit
Contd….
• After tax Corporate profit = Distributed Corporate Profit (DC∏) +
Undistributed Corporate Profit (UC∏)
• Corp ∏ - Corp ∏ tax = DC∏ + UC∏; DC∏= Dividend
• = Dividend + UC∏
• Personal Income (PI)= NI - Corp∏ + Dividend – Social Insurance
Contribution + Transfer receipts + (Personal Interest Income – Net
Interest) Interest Adjustment
• Disposable Personal Income (DPI)= PI – Personal tax and non-tax
payment.
Exercise
• The following information is give for an economy:
• GNP=2400, Gross Investment= 400, Net Investment= 150,
Consumption=1500, Govt Purchase=480, NI=1925, Wages &
Salary=1460, Proprietor’s income+rental income of person=160,
Dividends=50, Govt Budget Surplus= 15, Interest Adjustment=60,
Govt transfer to persons=260, Business Transfer payment=0, Personal
tax and non-tax payment=300, Personal Interest Income=190.
• What is a) NNP, b) Net export, c) Indirect Tax, d) Corporate profit, e)
Taxes-Transfer, f) Personal Income, g)DPI, h) Personal Savings.

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