National Income Accounting

National Income Accounting

• In the mid-1930s, two Keynesians, Simon Kuznets and Richard Stone,

began to develop this terminology
• a set of rules and definitions for measuring economic activity in the
aggregate economy – that is, in the economy as a whole.
Measuring Total Economic Output of Goods
and Services
• Gross Domestic Product (GDP) is the total market value of all final
goods and services produced in an economy in a one-year period.
• Gross National Product (GNP) is the aggregate final output of citizens
and businesses of an economy in one year.
• GDP measures the economic activity that occurs within a country.
• GNP measures the economic activity of the citizens and businesses of
a country.
GDP Measures Final Output
• Final output – goods and services purchased for final use.
• Intermediate products are used as inputs in the production of some
other product.
• Counting the sale of final goods and intermediate products would
result in double and triple counting.
The National Income Accounting Identity
• The equality of output and income is an accounting identity in the
national income accounts.
• The identity can be seen in the circular flow of income in an economy.
Methods of Calculating National income
• There are three methods of calculating national income:
(i) The product method
(ii) The expenditure method
(iii) The income method.
Product Method
• In this method, national income is measured as a flow of goods and
services.
• We calculate money value of all final goods and services produced in
an economy during a year.
• To avoid the problem of double counting we can use the value-
addition method.
• The money value is calculated at market prices so sum-total is the
GDP at market prices
The Expenditure Approach
• In this method, national income is measured as a flow of
expenditure.
• Specifically, GDP is sum-total of private consumption expenditure.
Government consumption expenditure, gross capital formation and
net exports.

GDP = C + I + G + (X - IM)
The Incomes Approach
• Under this method, national income is measured as a flow of factor
incomes.
• There are generally four factors of production labour, capital, land and
entrepreneurship When we add indirect taxes (less subsidies) and
depreciation to nations income, we have GDP.
• Accordingly there are four factor payments, namely rent,
compensation of employees, interest, and profit.
GDP and NDP
• Net domestic product is GDP adjusted for depreciation:
GDP = C + I + G + (X - IM)
NDP = C + I + G + (X - IM) - Depreciation
Gross Vs. Net
• Depreciation or capital consumption is the amount by which an assets
value falls in a given period.
Net Investment = Gross Investment less depreciation.

Capital stock at end of period = capital stock at beginning of period

+net investment
NNP
• National Income = net national product at factor cost
• NNP at factor cost = GDP at market prices less indirect taxes plus
subsidy+ NFIA less depreciation
• NFIA can be positive or negative= receipt of factor income from the
rest of the world minus the payment of factor income to the rest of
the world.
Other National Income Terms
• Personal income (PI) is national income plus net transfer payments
from government minus amounts attributed but not received.
• PI = NI + transfer payments from government - corporate retained
earnings - corporate income taxes – employment taxes (CPP, EI)
• Disposable personal income is personal income minus personal
income taxes and payroll taxes
• Disposable personal income is what people have readily available to
spend.
DPI = PI - personal taxes
 Calculate Gross National Disposable Income from the following data:
Items (` in crore)
(i) National income 2,000
(ii) Net factor income from abroad (-)50
(iii) Consumption of fixed capital 200
(iv) Net current transfers from rest of the world 150
(v) Net indirect taxes 250
• Gross National Disposable Income = National income + Consumption
of fixed capital + Net current transfers from rest of the world + Net
indirect taxes
• = ` 2,000 crore + ` 200 crore + ` 150 crore + ` 250 crore = ` 2,600 crore