National Income

Accounting

Dr M Manjunath Shettigar
3- National Income Accounting
Understand the meaning of national income
accounts
Having an overview of different measures of
national income accounting
Understanding the significance these measures
have in the economy
National Income- Net National Product (NNP)at
factor cost
Personal Income vs Disposable Income
Objectives

Understand the meaning of national income

accounting
Having an overview of different measures
(concepts) of national income
Comparison of national income accounts of
different countries.
Understanding the significance of these
measures
National Income
Accounting
National Income Accounting

National Income Accounting

is the term used in economics to refer to

the accounting system that a national
government uses to measure the level of the
country's economic activity in a given time
period.
National income accounting
It provides economists and statisticians with
detailed information that can be used to track the
health of an economy and to forecast future
growth and development.
Although national income accounting is not an
exact science, it provides useful insight into how
well an economy is functioning, and where
monies are being generated and spent.
Some of the metrics calculated by using national
income accounting include gross domestic
product (GDP), gross national product (GNP) and
net national product (NNP).
 National Income

WHAT IS NATIONAL INCOME?

National Income is the sum of factor income earned by

the normal residents of a country in the form of
wages, rent, interest and profit in an accounting
year (Central Statistical Organization).

Alternatively, it is the money value of all the final

goods and services produced annually in the
country.
 the aggregate of earnings from a nation's current
production including compensation of
employees, interest, rental income, and profits of
business after taxes

Total market value of all the final goods and

services produced in an economy in a given
period of time
National Income

Income of the nation during one year

Total amount of income generated in the country

in a years time

Aggregate money value of all final goods and

services produced in a country during one year
National income accounting

Importance of National Income Data

1. to measure the performance and working of the

economy.
2. to understand the structure of the economy.
3. to measure the standard of living of the people.
4. to understand the functional and personal
distribution of income.
5. for international comparison of economies and
standard of living of the people.
6. for use in national economic planning and policy
making.
In economics, the Lorenz curve is a graphical representation of
the cumulative distribution function of a probability distribution;
it is a graph showing the proportion of the distribution
Classification of income
Income is classified on several grounds:

National Income Vs. Domestic Income

Income at Market price Vs. income at Factor cost

Gross Income Vs. Net Income

Income at current price and Income at constant

price
National Income Vs. Domestic
Income

National Income: income generated/ output

produced by normal residents of the country in a
year
Domestic Income: income generated/ output
produced in the country in a year
National Income Vs. Domestic
Income
Domestic income and National income: the
difference between the 2 concepts is Net factor
income from abroad. (Net factor income from
abroad = income earned by our nationals from
abroad minus income earned by foreigners from
our country)
 Domestic territory

What is domestic territory?

All those areas from where an economy gets its

domestic income. It includes political boundaries,
embassies, Fleets, aircrafts, shipping vessels of a
concerned country functioning in other countries/
international waters.
Normal residents

Who are the (normal) residents of a country?

A person or the firm working in a country for

more than a year, with his/its economic interests
in that country.
 National Income at market price
Vs. National Income at Factor
cost
National Income at market price: estimated in
terms of value of goods and services produced
(at market price)
National Income at Factor cost: estimated in
terms of income received by factor owners
National Income at market price Vs.
National Income at Factor cost

the difference between the 2 concepts is Net

indirect taxes. (Net indirect taxes = Indirect taxes
Subsidies)
Gross Income Vs. Net Income

Gross Income is total (gross) income/ output in

the country in a year.

Net Income is equal to Gross Income less

Depreciation

NI = Gross income Depreciation

the difference between the 2 concepts is

Depreciation of capital assets used in production.
Income at current price and Income
at constant price

Income at current price is national income

estimated at current market prices

Income at constant price is national income

estimated at prices existing at some base year

Nominal GDP Vs. Real GDP

Concepts and measurement of
National Income
Gross Domestic Product (GDP)
Gross National Product (GNP)

Net Domestic Product (NDP)

Net National Product (NNP)
Concepts and measurement of
National Income

Gross Domestic Product (GDP)mp

Gross National Product (GNP)mp
Net Domestic Product (NDP)mp
Net National Product (NNP)mp

Gross Domestic Product (GDP)fc

Gross National Product (GNP)fc
Net Domestic Product (NDP)fc
Net National Product (NNP)fc
Concepts and measurement of
National Income

Personal Income
Personal Disposable Income
Per capita income
Personal income
Personal income refers to the current income of
persons or households from all sources. We can
estimate personal income from Net National
Product (NNP) at factor cost by deducting from it
a) undistributed profits of companies, b)
corporate income tax payable by enterprises, and
c) contributions to social insurance made by
individuals, and adding to it d)Transfer payments
received by people from government.

Personal Income = NNPFC corporate taxes

undistributed profits contributions to social
insurance + transfer payments

Personal Disposable Income:

Personal disposable income is income available

to households/ persons, which they can spend/
dispose off. It differs from personal income by the
amount of direct taxes paid by individuals.

Personal Disposable Income = Personal income

Personal taxes
Per capita income:

Per capita income refers to the average income

per head of population in the county. It is equal to
National income divided by the countrys
population.

Per Capita Income = National Income

Total Population
Gross Domestic Product (GDP)
Means:
Market value of final goods and services
produced in an economy over a given period
of time
Market value
-expressed in common unit of measurement
Produced
-Refers to output produced and not output sold
Final
-Include value of intermediate product in the value of
final product
Value Added = Total Value Created Value of Intermediate
Goods.
It also means:

the total value of output of goods and services

produced in a county in a given period of time
regardless of the ownership of the factors of
production. It therefore includes both consumer
and capital goods and the output of both the
private and public sectors.

GDP(FC)=GDP(MP)- Net Indirect Taxes

Net Indirect Taxes= Indirect taxes-subsidies
Things not counted in GDP
1. Second hand sales (no production)
2. Public/Private Transfer Payments
3. Purely Financial Transactions
4. Intermediate goods
5. Indian companies/citizens producing outside
6. Non-Market Transactions(household or
volunteer work)
7. Illegal Business Activity
8. Unreported legal business activity
Nominal Vs. Real GDP
when the value of goods and services is found
out by multiplying the quantity produced during
one year by the prices prevailing in that year, we
call it National income at Current Prices which is
the Nominal GDP.

when the value of goods and services is

calculated by multiplying the quantity during one
year with prices of the base year, we call it
National Income at Constant Prices which is the
Real GDP.
 Real GDP = value of final goods and services in
constant prices

Nominal GDP = value of final goods and services

in current prices

GDP deflator = Nominal GDP X 100

Real GDP
Components of GDP
C = consumption
I = investment
G = Govt. spending
X M = Net exports
 Gross National Product (GNP)
Is the total output produced by domestically
owned factors some of which may be located
abroad.
It is calculated from GDP by adding on net
property income from abroad.
It refers to the total value of all the final goods and
services produced during the period of one year
plus the net factor incomes earned from abroad
during the year.
Word gross is used to indicate that the total
national product includes in it that part of product
which represents depreciation.
 GNP contd.
GNP includes the economic activities of all the
residents of a nation whether operating within the
country or outside it.
It takes into account the incomes which the residents
get from rest of the world and at the same time it
excludes those incomes which arise from the
economic activities within the country but have to paid
out to the non-residents operating in the country.
For example, the profits of a Indian-owned company
operating in the UK will count towards Indias GNI and
UK GDP, but will not count towards UK GNI or Indias
GDP.
GNP contd.
GNP being the monetary measure of all final
goods and services produced, is widely used as
an index for judging the performance of an
economy.
GNP = GDP + NFIA
NFIA= Net Factor Income from Abroad
Gross National Income(GNI)
GNI comprises the total value produced within a
country (i.e. its gross domestic product), together
with its income received from other countries,
less similar payments made to other countries.
GNI consists of: the gross private investment and
consumption expenditures, the government
consumption and investment expenditures, the
gross exports of goods and services, less: the
gross imports of goods and services, and the net
income from assets abroad (net income receipts),
less the indirect business taxes.
 The GNI is similar to the gross national product
(GNP), except that in measuring the GNP one does
not deduct the indirect business taxes.
Gross national income (GNI) is GDP less net taxes on
production and imports, less compensation of
employees and property income payable to the rest
of the world plus the corresponding items receivable
from the rest of the world.
An alternative approach to measuring GNI at market
prices is as the aggregate value of the balances of
gross primary incomes for all sectors; (GNI is
identical to GNP).
 Net National product at Market Price
(NNP mp )
NNP at market price is equal to GNP minus the
charges of depreciation and replacements.

Depreciation represents the values of fixed capital

consumed during the process of production.

NNP mp = GNP mp Depreciation

Concept of NNP is important because it gives an

estimate of the net increase in the output of final
goods and services
Net National Product at Factor Cost
( NNP fc) or National Income

NNP fc or National Income is equal to the sum

total of factor incomes received by the factors of
production during the year
It is equal to the sum of rent, wages, interests
and profits in a given year.
The sum total of incomes of the factors of
production is known as National Income or Net
National Product at factor cost.
 Thus, the national income is equal to the NNP at
mp minus revenue of the Government by way of
indirect taxes plus subsidies provided by the
Government to the business sector.

NNP fc = NNP mp - Indirect Taxes + Subsidies

OR

NNP fc = NNP mp - net indirect taxes

GDP = C + I + G + (X - M)
GNP = C + I + G + (X - M) + NR/NFIA
GNI = C + I + G + (X - M) + NR/NFIA IBT
C = Personal Consumption Expenditures
I = Gross private domestic investment
G = Government consumption and gross
investment expenditures
X = Gross exports of goods and services
M = Gross imports of goods and services
NR = + or - Net income(income receipts) from assets
abroad/NFIA= Net factor Income from Abroad
IBT = Indirect business taxes
 Private Income is the total of factor income from all
sources and current transfers from the government and
rest of the world accruing to private sector.
Personal Income(PI) is the total income received
whether it is earned or unearned by the households of
the economy before the payment of personal taxes.
It is found by adding transfer payments to and
subtracting social security contributions ,corporate
income taxes and undistributed corporate profits from
the National Income.
Personal disposable Income(PDI) is the total income
available to households after the payment of personal
taxes. It is equal to PI less personal taxes and also equal
to personal consumption expenditures plus personal
saving.
 In an economy, GDPMP is Rs.12,000 crores, the
total consumption expenditure on goods and
services is Rs.4500 crores, gross investment is
Rs.3500 crores and government expenditure is
Rs. 3000 crores. If exports are Rs.1500 crores find
the imports
 GDP Measurement

There are three ways of measuring GDP:

1. The Product Method or Product Approach

2. The Expenditure Method or Expenditure Approach

3. The Income Method or Income Approach

 The Production Method or Production
Approach

Adding the value of all goods and services produced

in the economy expressed in market prices.
Arrives at the true value of goods and services not by
adding up the total value of production but the
VALUE ADDED at each stage of production
This method is based on the total production of a
country during a year.
The production approach looks at GDP from the
standpoint of value added by each input in the
production process.
 First of all production units are classified into
primary, secondary and tertiary sectors.
Then identify the various units that come under
these sectors and estimate the goods and services
produced in each of these sectors.
The sum total of products produced in these sectors
is the total output of the nation.
The next step is to find out the value of these
products in terms of money.
The money sent by Indian citizens working abroad
is also added to this.
Now we get the gross national income.
GNI = Money value of total goods and services +
Income from abroad.
The Income Method or Income Approach
The income approach divides GDP according to who
receives the income from the spending flow.
In addition to aggregate income, national income and
personal income are also used as measures of
income.
Measures economic activity by adding all incomes
received by producers of output
Income from wages (w)
Rent from land (r )
Interest (i)
Profit (p)
Mixed income
GDP(FC)= w+r+i+p+mi
 The Income Components Include:
Wages and salaries
Corporate profits
Proprietors income (the profits of partnerships and
solely owned businesses, like a family restaurant)
Farm income
Rent
Interest
Indirect taxes
Depreciation (the amount of capital that has worn
out during the year)
 Interest (only the interest payments made by business
firms are included and the interest payments made by
government are excluded).
Corporate profits which are subdivided into:
Corporate income taxes
Dividends
Undistributed corporate profits

Three additions are made to the income side to balance

it with expenditures.
1.Indirect business taxes are added because they are initially income
that later gets paid to government.
2.Depreciation or the consumption of fixed capital is added because
it is initially income to businesses that later gets deducted in
calculating profits.
3.Net foreign factor income is added because it reflects income from
all domestic output regardless of the foreign or domestic
ownership of domestic resources.
 Factors of production together produce output
and income. The income received by the factors
of production during a year can be obtained by
adding rent to land, wages to labor, interest to
capital and profit to organizations.
This will be equal to the income of the nation.
By adding the money sent by the Indian citizens
from abroad to the income of the various factors
of production, we get the gross national income.
GNI = Rent + Wage + Interest + Profit + Income
from abroad.
 The Expenditure Method or
Expenditure Approach
The spending approach divides GDP into four areas:
households (consumption) (C)
businesses (investment) (I)
government (G) and
foreigners (net exports) (X-M).

Measures economic activity by adding the amount

spent by all ultimate users of the output
Also arrives at GDP(MP)
Y=C+I+G+(X-M)
X-M is also termed as Net Exports (NX)
 National income can also be calculated by adding
up the expenditure incurred for goods and services.
Government as well as private individuals spend
money for consumption and production purposes.
The sum total of expenditure incurred in a country
during a year will be equal to national income.
GNI = Individual Expenditure + Government
Expenditure.
This method will help us to identify the expenditure
incurred by different agents.
Why output = expenditure
Unsold output goes into inventory, and is
counted as inventory investment .
..whether the inventory buildup was intentional or
not.

In effect, we are assuming that firms purchase

their unsold output.
Methods of measuring sectoral income
in India
Production method
Agriculture & allied activities, forestry & logging,
fishing, mining & quarrying, registered
manufacturing.
Income method
Unregistered manufacturing, gas, electricity and
water supply, banking and insurance, transport,
communication and storage, real estate and
ownership of dwellings, trade, hotels and
restaurants, public administration and defence,
other services.
Expenditure method
construction
Classify the following into GDP or GNP

Value of road constructed by an US firm in India

Toyota building a car in its Indian plant.
An Indian based in Dubai sends his salary earned
in Dinars to his home in Kerala.
 POINTS TO REMEMBER
National income is the sum total of all the incomes earned by a nation
during a particular period of time.
National income shows how the income is distributed between the
wages, interest, profit and rents.
National income is treated as an index of the economic activity of a
nation. If national income reduces, the government will cut down the
taxes so that citizens will have more income to spend.
GNP is the measure of money income in which all kinds of goods and
services produced in a country and net income from abroad, during one
year are taken into consideration.
Market price of only final products shall be taken into account, while
measuring GNP.
Goods and services rendered free of charge are not included in GNP.
Transactions which do not arise from the production of current year are
not included in GNP.
Profits earned or losses incurred on account change in capital assets as
a result of market fluctuation and illegal activities are not included in
GNP.
 There are three approaches to estimate GNP namely,
1. Income method
Wages and Salaries + Rent + Interest + Dividends + Undistributed
Corporate Profits + Direct Taxes + Indirect Taxes + Depreciation + Net
Income from Abroad.
2. Expenditure method
Private Consumption Expenditure + Gross Domestic Private Investment +
Government Expenditure on Goods and Services + Net Foreign
Investment.
3. Value added method/Output method
The money value of all final goods and services produced at current prices
during a year is taken into account.
GNP at market prices refers to gross value of final goods and services
produced annually by country plus net income from abroad.
GNP at factor cost is the sum of the money value of the income produced
by and accruing to the various factors of production in one year in the
country.
National Income = C + I + G + (X M) : where C = Consumption, I =
Investment, G = Government and X is Export and M is Import.
NNP= GNP-Depreciation.
 Net National Product at market prices is the net value of final goods and
services evaluated at market prices.
Net National Product at factor cost is the net output evaluated at factor
price. It includes income earned by factors of production.
Domestic income or product income is generated by factors of production
within the country from its own resources.
Domestic income includes (1) Wages and Salaries (2) Rents including
imputed house rents (3) Interest (4) Dividends (5) Undistributed capital
profits including surplus of public sector undertakings (6) Mixed income
consisting of profits of unincorporated firms, self employed persons,
partnerships etc and direct taxes.
Private income is obtained by private individuals from any source
productive or otherwise and the retained income of corporations.
Personal income is the total income received by the individuals of a
country from all source prior to direct taxes in one year.
Disposable income or personal disposable income refers to the actual
income which can be spent on consumption by individuals and families.
Real income is nothing but the national income expressed in terms of a
general level of prices of a particular year which is taken as base year.
The average income of the people of a country in a particular year is called
per capita income for that year.
Per capita GDP

GDP divided by total population of the economy

Useful for comparing GDP across the countries
Brings about parity between different economies
 Purchasing Power Parity(PPP)
PPP is the best measure to compare prices and
economies
PPP is the amount of a certain basket of basic goods
which can be bought in the given country with the
money it produces.
Using a PPP basis is arguably more useful when
comparing differences in living standards on the
whole between nations as it takes into account the
relative cost of living and the inflation rates of
different countries, rather than just a nominal GDP
comparison.
 An economic theory that estimates the amount of
adjustment needed on the exchange rate between
countries in order for the exchange to be equivalent
to each currency's purchasing power.

The relative version of PPP is calculated as:

S = P1
P2
Where:
"S" represents exchange rate of currency 1 to
currency 2
"P1" represents the cost of good "x" in currency 1
"P2" represents the cost of good "x" in currency 2
 In other words, the exchange rate adjusts so that
an identical good in two different countries has
the same price when expressed in the same
currency.
By correct value, the exchange rate that would
bring demand and supply of a currency into
equilibrium over the long-term.
The current market rate is only a short-run
equilibrium.
Purchasing power parity (PPP) says that goods
and service should cost the same in all countries
when measured in a common currency.
India Rs.99 2.12 30.75 46.60 - 34