ECO-STATS

National Income Accounting

Concepts and Measurements

 Example
•If the value of a meter of cloth is Le. 20 and
Meaning of National Income
the total cloth produced is 100 meters, then the
money value of cloth is Le. 2000. In this way we
National income is the money value of all the final goods and can find out the value of other goods and
services produced by a country during a period of one year. services and the total value of all the goods and
National income consists of a collection of different types of services produced during one year.
goods and services.
Basic Concepts in National income
•Gross Domestic Product (GDP)
•Net Domestic Product (NDP)
NI is the Money measure of,
•Gross National Product (GNP)
The net value of all products & services of an economy
•Net National Product (NNP)
during a year
counted without duplication, after having allowed for
depreciation both in the public & private sectors,
including consumption & capital goods sectors,
Basic Concepts in National
finally throwing in the net gains from international
income
transactions comprising of gains, not merely from export,
•Personal Income (PI)
import, trade but also from capital lent or invested
•Disposable Personal Income
abroad
(DPI)
•Real income
Circular Flow of Income (Four Sector Economy)
Gross Domestic Product
• Gross domestic product is the money value of all final goods and services produced in the domestic territory of a country
during an accounting year.

Gross Domestic Product

•Domestic territory means territory lying within the political frontiers, including territorial waters of the country.
Ships and aircrafts operated by the residents of the country between two or more countries.

Gross Domestic Product at Current price

• GDP can be estimated at current prices and at constant prices. If the domestic product is estimated on the basis of the
prevailing prices it is called gross domestic product at current prices.

Gross Domestic Product at Constant price

• If GDP is measured on the basis of some fixed price, that is price prevailing at a point of time or in some base year
it is known as GDP at constant price or real gross domestic product.
Net Domestic Product
• While calculating GDP no provision is made for depreciation allowance (also called capital consumption allowance). In
such a situation gross domestic product will not reveal complete flow of goods and services through various sectors.

Net Domestic Product

• A part of is therefore, set aside in the form of depreciation allowance. When depreciation allowance is subtracted
from gross domestic product we get net domestic product.
NDP = GDP – Depreciation

Gross National Product

• Gross national product is defined as the sum of the gross domestic product and net factor incomes from abroad. Thus
in order to estimate the gross national product of Sierra Leone we have to add net factor income from abroad -
income earned by non-resident in Sierra Leone to form the gross domestic product of Sierra Leone.
GNP = GDP + NFIA.
 Net National Product
• It can be derived by subtracting depreciation allowance from GNP. It can also be found out by adding the net factor
income from abroad to the net domestic product.
NNP = GNP – Depreciation
OR
NNP = NDP + NFIA

NNP at factor cost or National Income

• NNP at factor cost is the volume of commodities and services turned out during an accounting year, counted without
duplication. It can also be defined as the net value added at factor cost in an economy during an accounting year.

NNP at factor cost or National Income

• NNP at factor cost or national income is defined as the sum of domestic factor incomes and net factor income form
abroad. If NNP figure is available at market price we will subtract indirect taxes and add subsidies to the figure to get NNP
at factor cost or national income of the economy.

NNP at factor cost or National Income

NNP at FC = National Income = FID + NFIA
FID factor income earned in the domestic territory of a country.
Net Factor Income from Abroad.
Personal Income and Disposable income
• Personal income and disposable income are two concepts of national income very commonly used in
advanced countries. Personal income may be defined as the current income of persons or households
from all services. Personal income is not a measure of production.

Disposable Income
All personal income is not at the disposal to be spent on consumption. Individuals have to pay personal direct taxes to the
government. They are free to spend only after the payment of taxes.
DPI = Personal income – Personal Direct taxes.

Disposable Personal Outlay

The disposable personal income may be spent fully or individuals may save. What remains after saving is
called the personal outlay. Disposable income is equal to consumption and savings.
Disposable outlay = Disposable income – Savings.

Real Income
Since national income does not reveal the real state of the economy, the concepts of real income has been used. To find out
the real income of the economy, a base year is selected and the price level of that year is assumed to be 100.
Real income= Money Income × 100
Price Index
Methods of Measuring national income
§ Census method or production method
§ Income method
§ Expenditure method Limitations of Product Method
§ Value added method. § Problem of Double Counting:
unclear distinction between a final and an
intermediate product.
§ Not Applicable to Tertiary Sector:
This method is useful only when output
Product Method can be measured in physical terms
According to this method, Value of output is estimated § Exclusion of Non Marketed Products
Value of intermediate goods (input) is deducted from the value of output E.g. outcome of hobby or self consumption
to obtain Gross Value Added § Self Consumption of Output
Gross Value Added = Value of Output – Value of intermediate goods Producer may consume a part of his
Net Value Added = Gross Value Added – Depreciation production.
Income Method
The net income received by all citizens of a country in a particular year, i.e. total of net Limitations of Income Method
rents, net wages, net interest and net profits. It is the income earned by the factors of Exclusion of non monetary income:
production of a country. Ignores the non-monetized section
Process of economic activities.
§ Economy is divided on basis of income groups, such as wage/salary earners, rent Economic activities that contribute
earners, profit earners etc. to national income, but due to their
§ Income of all the groups is added, including income from abroad and undistributed non monetary nature, they go
profits. unrecorded. For e.g. a farmer and
§ The income earned by foreigners and transfer payments made in the year are family working in their own field.
subtracted.
Exclusion of Non Marketed
Services: People undertake a
Income Method particular activity that are difficult
GNP = wages and salaries + rent +interest + Dividends + undistributed to ascertain in money value. E.g.
corporate profits + mixed incomes + direct taxes + indirect taxes + depreciation mother’s services to the family.
+ net income from abroad.
Expenditure method
Value Added Method
The total expenditure incurred by the society in a particular In order to avoid double counting value
year is added together to get that year’s national income. added at each stage of production should
Components of Expenditure: be calculated to arrive at GNP.
§ personal consumption expenditure The difference between the value of output
§ net domestic investment and input at each stage of production is
§ government expenditure on goods and services, and called the value added.
§ net foreign investment By summing such value added for all
industries in the economy, GNP can be
found out.
Limitations

§ Ignores Barter System

§ Ignores Own Consumption
§ Affected by Inflation
Difficulties in Measurement of National Income Importance of National Income Analysis
They provide as an index of economic activity and
Non monetized transactions: Exchange of goods and services an instrument of economic planning.
which have no monetary payments, like services rendered out of
love, courtesy or kindness are difficult to include in the National income accounting indicates the growth of
computation of national income. the economy in terms of income and output.

Unorganized sector: Contribution of unorganized sector are National income statistics help the policy makers to
unrecorded. It is very difficult to identify income of those who do frame policies to achieve full employment and rapid
not pay income tax. economic growth.

Multiple sources of earnings: Part time activity goes unrecognized A complete knowledge about the trends in national
and such income is not included in national income. income is essential in economic planning.

C a t e g o r i z a t i o n o f g o o d s a n d s e r v i c e s : I n m a ny c a s e s Research scholar also make use of national income

categorization of goods and services as intermediate and final data pertaining to input, output, saving,
product is not very clear. consumption, investment and employment.

Inadequate data: Lack of adequate and reliable data is a major National income statistics it helps in solving the
hurdle to the measurement of national income of underdeveloped remove inequalities in income distribution.
countries.
Mathematical summaries of various concepts

GNP at market price – depreciation = NNP at market price

GNP at market price – net income from abroad = GDP at market price

GNP at market price – net indirect taxes = GNP at factor cost

NNP at market price – net income from abroad = NDP at market price

NNP at market price – net indirect taxes = NNP at factor cost

Mathematical summaries of various concept

GDP at market price – net indirect taxes = GDP at factor cost

GNP at factor cost – depreciation = NNP at factor cost

NDP at market price – net indirect taxes = NDP at factor cost

GDP at factor cost – depreciation = NDP at factor cost.

 Examples

GDP in 20X2 is 400,000. Which of the following is true regarding the national income
Jacob, a U.S. citizen, works in Paris and earns accounts?
30,000. A. GDP > GNP
Jacques, a French citizen, works in Boston and B. NNP > GNP
earns 40,000. C. Personal income > national income
Rachel, a U.S. citizen, owns a condominium in D. National income > NNP
Berlin which she rents to a German family for E. Personal income > disposable personal income
20,000. Answer 1.2: E
Angela, a German citizen, owns a warehouse in Statement A: GDP may be more or less than GNP. For the world
California which she rents to a U.S. firm for 70,000. as a whole (combining the national income accounts for all
What is U.S. GNP in 20X2? countris), GDP = GNP.
A. 340,000 B. 350,000 C. 390,000 D. 410,000 Statement B: NNP = GNP – depreciation, so NNP < GNP.
E. 460,000 Statement C: National income is more than personal income in
the United States, though the relation depends on the size of
Answer : A personal transfer payments and corporate taxes.
400,000 + 30,000 – 40,000 + 20,000 – 70,000 = Statement D: National income = NNP (net national product),
340,000 except for statistical discrepancies.
Statement E: Personal income – personal taxes = disposable
personal income
National income has the following pieces:
Net factor income from abroad = 10
Income from private domestic industries = 780
Income from governmental industries = 100

The national accounts also show

Personal consumption expenditures = 500
Government purchases = 250
Exports = 40 Imports = 60
Depreciation = 30

What is gross private domestic investment?

A. 150 B. 180 C. 220 D. 230 E.240
Answer 1.3: B

Measuring by the production approach gives National

income = NNP = 10 + 780 + 100 = 890.
Subtract factor income from abroad to get NDP = 890 –
10 = 880.
Add depreciation to get GDP = 880 + 30 = 910.
Use expenditure approach: GDP = 500 + 250 + (40 – 60) +
investment A investment = 910 – (500 + 250 + 40 – 60) =
180
France has proposed a GDP yardstick that better measures social welfare.

Why might real GDP not be a good measure of social welfare?

Why are the criticisms of real GDP too subjective for scientific use?

Why might traditional real GDP be a good measure of social welfare?

Part A: The problems of real GDP as a measure of social welfare are shown by the Soviet satellites before the collapse of
the Soviet Union, such as East Germany. Industrial production was forced on communities with no concern for
environmental hazards. The social welfare costs of pollution often exceeded the welfare benefits of higher real GDP.

Part B: Social welfare costs like global warming and degradation of the environment depend on the observer. Carbon
dioxide emissions might expose the world to natural catastrophes and a less healthy environment many years in the
future, but these costs are unknown.

Part C: Economic progress is often the best way to solve other problems. Wealthier countries can afford better
education and health care for their citizens; programs to reduce air and water pollution; and welfare payments to
reduce income inequality. During the transition phase, developing countries may neglect non-economic goals, and they
may have high growth rates of real GDP but poor results on other objectives. In the steady state phase, the wealthier
countries have the best grades on other indices of social welfare.