NATIONAL INCOME

ACCOUNTING
Prof. (Dr) Vandana Bhavsar
 Real Wealth or Real Income

Real wealth is the wealth

generated by a country in terms of
the goods and services it produces.

Paper money is nominal wealth.

What National Income
Measures ?
Measures the
Production, Income,
and Spending of
Nations
It measures the total value of the
goods and services (output) produced
by an economy over a period of time
(normally a year).

It is also a measure of the income

flown from production, and/or the sum
total of all spending involved for the
production of output.
Standard Measures of Income
and Output
 Gross National Product (GNP)
 Gross Domestic Product (GDP)
 Gross National Income (GNI)
 Net National Product (NNP)
 Net Domestic Product (NDP)
 Net National Income (NNI)
 Per Capita Income (PCI)
 Personal Disposable Income (PDI)
In India, the Central Statistical
Organization (CSO) has been estimating
the National Income
GNP : the total value of all final output
(goods and services) produced and income
received in a year by domestic residence of a
country.
Includes the profits earned from capital
invested abroad

GDP : the total value of all final output

(goods and services) produced by the factors of
production located within the country’s
boundary in a year
Factors of production (labor, capital, land) may
be owned by any one (citizens or foreigners)

GNP - Net income earned from abroad = GDP

NNP: decline in capital assets (plant &
machinery) due to wear and tear is
measured as ‘capital depreciation’.
NNP = GNP – Depreciation
Government announces the rate of depreciation in the
economy. Depreciation is usually 11%.

NDP : same as above, depreciation on

GDP.
NDP = GDP – Depreciation

Thus,
NNP = NDP + Net foreign income earned
from abroad
 National Income at Market Price and
Factor Cost
National Income (GDP) at Market Price
It is defined as the market value of the output of
final goods & services produced in the domestic
territory of a country during an accounting year.
GDP = P x Q
This includes taxes, subsidies, profits.
National Income (GDP) at Factor cost
It is sum total of all factors of production for
their contribution in the production i.e.
Land, Labour, Capital, raw materials etc.
This includes only costs and not taxes, duties,
profits etc.
Thus
NIfc = NImp – Indirect taxes + subsidies
or
NIfc = W + i + R + Profits – TPs
where,
W= wages, salaries and supplementary incomes
i = interest paid/earned
R = rent of all goods and services
Profits = of all business (farmers, partnerships,
professionals, joint stock companies etc.
TPs = Transfer payments e.g. old age pensions,
unemployment benefits, interest on public debt.
Personal Income [PI] – PI NI
PI is the total income received by individuals
whether it is earned or unearned before the
payment of personal taxes.

PI = NI + income received but not earned –

income earned but not received.

OR

PI = NI + Social Security Payments+ Unemployment

Compensation Payments + Welfare Payments -
Social Security contributions - Corporate Income
Taxes - Undistributed Corporate Profits
Income Earned But Not Received
Social Security contributions = contributions to EPF.
It is income earned by the employee but not received.
Corporate Income Taxes = these are not available
for dividend payments to the household sector.
Undistributed Corporate Profits = these are profits
that could be paid out as dividends, but are usually
retained to finance capital investment projects.

Income Received But Not Earned

Social Security Payments = old age pensions
Unemployment Compensation Payments
Welfare Payments = are transfer payments from govt.
to lower income group.
 Per Capita Income and Personal
Disposable Income
Per Capita Income (National Income per person)
it is an indicator to show the living standards of
the people of the country.

Personal Disposable Income

It is that part of personal income which the
households can spend the way they like.
Disposable income is either spent or saved.
It shows the purchasing power of the households.
PDI = Personal Income – Personal taxes
 Private Income
It is the income of the private sector obtained from
any sources, productive or otherwise, and retained
income of the corporations.
As per CSO – it is total of factor income from all
sources and current transfers from the government
and rest of the world accruing to private sector.
Thus
Private Income
= Income from Domestic Product Accruing to
the Private Sector
+ Net Transfer payments from the Govt.
+ Net factor Income from Abroad
+ Transfer payments from the ROW
+ Interest on national debt
Private Income =
National income
+ Current Transfer earnings from the Govt.
+ Interest on National Debt
+ Net current transfers from the ROW
– Property and entrepreneurial income of the
Govt.
– Savings of non-departmental undertakings

Difference between N.I. and Private Income

N.I. includes income earned by public and private
sector
N.I. includes only incomes earned and excludes
transfers
N.I. does not include interest on national debt
 Methods Of Calculating N.I.
There are 3 approaches to the measurement
of national income:

Production or Value Added Method

Income Method

Spending or Expenditure Method

Output = Income = Expenditure

O=Y= E
 The Value Added/Product Method
This method is also known as Net Output Method or
Industrial Origin Method.
It measures the contribution of all the producing
enterprises in the domestic territory of a country
within the accounting year.
So it gives us GDP.
In this method, only the value of final goods is to be
included; otherwise there arises a problem of double
counting.
E.g. : Output of cement industry is the input
of construction industry… counting the
output of both industries will result in double
counting ….
 contd.
This duplication can be avoided in two ways:

Firstly by including the value of only final goods

avoiding the value of intermediate good i.e.
Value of output = Sales + Change in stock
or
= Sales + (Closing stock - Opening stock)
Secondly by using the value added method in case of
each enterprise.
It is value added that is included, not the value of
output.
Value added = Value of output - Value of
intermediate consumption
The difference between the value of goods as
they leave a stage of production and the cost of
the goods as they entered that stage.
Table: Value added in the Production of a Fuel
Stage of Cost of inputs Price of Value
Production (Rs) Output Added
(Rs) (Rs)

(1) Oil drilling 0 1000 1000

(2) Refining 1000 (oil) 1300 300
(3) Shipping 1300 (refined oil) 1600 300
(4) Retail sale 1600 (refined oil 2000 400
incl. shipping)
Total value 2000
added
 NI by Value Added Method

GDPmp = NDPfc = NNPfc =

NDPmp =
GVA from all NDPmp – NDPfc +
sectors GDPmp - Dep indirect taxes
NFIA
 The Income Method
NI = Compensation to employees
+ Mixed income
+ Operating Surplus
+ Net Factor Income from Abroad

Compensation Of Employees
Includes wages, salaries, and various
supplements viz employer contributions to social
insurance and retirement pension, paid to
households by firms and by the government.
Mixed Income
The income of unincorporated businesses. (the
profits of partnerships and solely owned
businesses, like a family restaurant)
Operating Surplus

• Rent and royalty

• Interest
• Profit (Corporate income taxes + Dividends +
Undistributed corporate profits)

Net Factor Income earned from Abroad:

Foreigners’ Income – Citizens’ Earning Aboard

Thus,
NI = W+ I + R + Profits
GDP = NI +Indirect taxes + Depreciation
 NI by Income method

NDPfc =
Compensatio
n of GNPfc = GNPmp =
NNPfc =
employees + GNPfc + Net
NDPfc + NNPfc +
Operating Indirect
NFIA Depreciation
surplus + Taxes
mixed
income
 What is not included in Income
method?
Transfer payments – scholarships, old age
pensions, etc.

Income from illegal sources – smuggling, black-

marketing, etc.

Income from sale of second hand goods – but

their commission charges are included.

Income from windfall gains – lottery, capital

gains
 The Expenditure Method
GDP = E = C + I + G + (X–IM)

 (C) = Households Consumption expenditures

 (I) = Businesses (Domestic Investment)
 (G) = Government (Govt. expenditures)
 (X-IM) = Export (X) and Imports (IM)

where E is aggregate expenditure

 contd……….
GDP = E = C + I + G + (X–IM)

Durable good + Non-durable goods +

Services (C)
(+) Resi. Investment + Non-resi.
Investment + Changes in inventories (I)
(+) Federal govt. + State govt. + Local
govt. (G)
(+) (Export – Import) (NX)

Gross Domestic Product (GDP)

 GNP = GNI = GNE
Value added Income Expenditure

GVA from all sectors C+I+G+ (X-IM)

Compensation of
employees +
Operating Surplus
GDPmp - Dep + Mixed income GDPmp - Dep

NDPmp – indirect NDI + NFIA NDPmp – Net

taxes Indirect Taxes

NDPfc + NFIA NDPfc + NFIA

NNPfc
NNPfc NNPfc
 REAL V/S. NOMINAL GDP

NI at Current & Constant Prices

Nominal GDP
measures these values using current
prices

Real GDP measures these values using

the prices of a base year.
Example
Assume economy only produces apples and
pears. In the year 2010, 100 apples & 50 pears
were produced
 price for an apple = Rs. 2,
 price for a pear = Rs. 3.
In 2015, because of the inflation at the same
production levels
 price for an apple goes up to Rs. 3,
 price for a pear is Rs. 4
The nominal GDP in 2010 is Rs. 350
 The nominal GDP in 2015 is Rs. 500.
However real GDP did not change, because real
GDP only changes with the changing production
level & therefore is a better size measure.
 NEED FOR THE STUDY OF
NATIONAL INCOME
To measure the size of the economy and level
of country’s economic performance

To trace the trend or speed of the economic

growth in relation to previous year(s) as well
as to other countries

To know the structure and composition of the

national income in terms of various sectors
and the periodical variations in them

To make projection about the future

development trend of the economy
 contd……
To help Govt. to formulate suitable
development plans and policies to increase
growth rates.

To fix various development targets for

different sectors of economy on the basis of
there performance.

To help business firms in forecasting

future demand for there products

To make international comparison of

people’s living standards.
 PROBLEMS IN CALCULATING
NATIONAL INCOME
Black Money : It has created a parallel economy
- unreported economy which is equivalent to the
size of officially estimated size of the economy

Non-Monetization : In most of the rural

economy, considerable portion of transactions
occur informally

Growing Service Sector : growing faster than

Agricultural and Industrial sectors… value
addition in legal consultancy, health service,
financial and business services is not based on
accurate reporting.
 contd………
House Hold Services : It ignores domestic work
and house keeping services

Social Services : It ignores volunteer and

unpaid social services.

Environment Cost : It does not distinguish

between environmental-friendly and
environmental-hazardous industries … cost of
polluting industries is not included in the
estimate.

It doesn’t consider poverty, literacy, public

health, gender equality etc.
NATIONAL INCOME SERIES IN
INDIA
National Accounting system was initiated in the
mid-sixties

Indian System of National Accounting statistics

follows the UN system of national accounts
(1968)

The CSO revised its national accounting series

by shifting the base year to 1970-71 … again to
1980 – 81 and then to 1993-94.. recently by
improving the database and extended coverage
the base year shifted to 2011-12
SECTORAL COMPOSITION ON N. I.

2010f
THANK YOU