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Chapter Two

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32 views13 pages

Chapter Two

Uploaded by

Gebyaw Demeke Aniley
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter Two: National Income Accounting

2.1 The Concept of National Income Accounting


 National income is the aggregate factor income (i.e., earnings of labour,
capital, etc.), which arises from the current production of goods and services
by the nation's economy.
 The nation's economy refers to the factors of production (labour, capital, etc.)
supplied by the normal residents of the national territory.
 National Income Accounting (NIA) refers to the process of record keeping
for the overall economic activities of a given country.
 It is the aggregate monetary value of all final goods and services produced in
a country during a year.
 It is a measure of an aggregate output, income and expenditure in an
economy.
Cont’d…
Why do we need to study NIA?
 It enables us to measure the level of total output and growth in a given
period of time, and to explain the causes for such level of economic
performances.
 It enables us to observe the long-run trend of the economy.
 It provides information to formulate policies and design plans.
 Knowledge of Structural Changes: National income accounts reveal
the structural changes taking place in an economy.
 Significance for Economic Analysis: It is essential to identifying
interrelationships between different sectors of an economy.
Cont’d…
2.2. The concept of GDP and GNP
 Gross Domestic Product (GDP) is defined as the total market value of
all final goods and services produced in the territories (within the
boundary) of the economy in a given year.
 Gross National Product (GNP) is defined as the total monetary value
of final goods & services produced by citizens of the country in a given
year. Thus, GDP and GNP are related as follows:
GNP = GDP + Net Factor Income (NFI)
NFI = (factor income received from abroad by a country's citizens) –
(factor income paid for foreigners to abroad).
When NFI > 0, then GNP > GDP
NFI < 0, then GNP < GDP
NFI = 0, then GNP = GDP
Cont’d…
 GDP is more commonly taken as the basic measure of a nation’s output as
compared to GNP. This is because:

 GDP is easier to measure, since data on net foreign earnings are usually poor.

 GDP is the better measure of the job-creating potential of the economy than is
GNP, and

 It makes international comparisons easier, as most countries use GDP

 GDP ignores transactions involving intermediate goods (in order to avoid double
counting).

 Double counting is considering an items more than once which leads over
estimation of national income.
Cont’d…
GDP also excludes two non-productive transactions i.e,
1) Purely financial transactions - which include:
- Public transfer payments because recipients make
- Private transfer payments no contribution to current
- Buying & selling of securities production in return for them.

Transfer payments: e.g. the state pension paid to retired people; income support paid to
families on low incomes; the jobseekers' allowance given to the unemployed and others.

2)Second hand sales - because such sales either reflect no current production or they
involve double counting

3)Intermediate goods are goods that are completely used up in the production of other
products in the same period that they themselves are produced.
Cont’d…
1.3 Approaches to measure national income (GDP/GNP)
 Basically, there are three approaches to measure GDP/GNP. These are:
1. Product/value added approach,
2. Expenditure approach and
3. Income approach
Product Approach: In this approach, GDP is calculated by adding the market value of
goods and services currently produced by each sector of the economy.
 In this case, GDP includes only the values of final goods and services in order to avoid
double counting.
There are two possible ways of avoiding double counting.
 Taking only the value of final goods and services
 Taking the sum of the valued added by all firms at each stage of production
Cont’d…
Sales value of Value
Stages of Production product Added

Firm A, sheep ranch $ 60 $ 60


Firm B, Wool processor 100 40
Firm C, suit manufacturer 125 25
Firm D, clothing wholesaler 175 50
Firm E, clothing retailer 250 75
Total sales value $ 710
Value added (total income) $250
Cont’d…
 Expenditure Approach: here GDP is measured by adding all
expenditures on final goods and services produced in the country by
all sectors of the economy. Thus, GDP can be estimated by summing
up personal consumption of households (C), gross private domestic
investment (I), government purchases of goods and services (G) and
net exports (NE).

Thus, GDP=C+I+G+NX
Cont’d…
Example1. Compute GNP and/or GDP using the following hypothetical
data of a certain country.
Value in billion birr
Personal consumption expenditure 6320
Government spending on goods and services 5000
Transfer payment 650
Income earned by foreigners in the country 500
Private investment 5780
Income earned by citizens abroad 800
Export 500
Import 750
Using the appropriate method, calculate GDP and GNP
Cont’d…
Solution
GDP = C + I + G + NE
= 6320 + 5780 + 5000 + 500 - 750
= 16850 billion birr
GNP = GDP + NFI
= 16850 + (800 –500)
= 17150 billion birr

Income approach: in this approach, GDP is calculated by adding all the


incomes accruing to all factors of production used in producing the
national output.
Cont’d…
 GDP = Compensation of employees (wages & salaries ) + Rental income + Interest
income + Profits proprietors‘ profit plus corporate profit) + Indirect business taxes +
Depreciation – Subsidies -Transfer payments
Example: Given the following data on different incomes earned.
Types of income Amount (in billion birr)
Compensation of employees 10,800
Proprietor’s income 400
Rental income 600
Corporate profit 4000
interest income 170
Deprecation 1600
Indirect business taxes 200
Income earned by foreigners in the country 500
Income earned by citizens abroad 800
Cont’d…
1. Compute GDP using income approach.
2. Compute GNP using income approach.
Solution
GDP using income approach is determined as follows:
GDP = W/S + i + R + I + Π +IBT+ D – TR – S
= 10800 + 170 + 600+ 400 + 4000 + 1600 + 200 – 0 – 0
= 17770 billion birr
GNP = GDP + NFI
= 17770 + 800 – 500 = 18070 billion birr
Cont’d…
2.4 Other Social Accounts (NNP, NDP, NI, PI and PDI)

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