National Income Accounting

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What is National Income Accounting?

National Income Accounting is a technique to measure the income and production of an economy. National Income Accounting is the study of a larger picture and managing the whole nation. While calculating National Income accounting, we consider two significant terms – Microeconomics, deals with individuals and organizations, and macroeconomics deals with the nation's economy as a whole. 

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Important Terminology Related to Macroeconomics and National Income Accounting in India

Fun Fact: The systematic keeping of national accounts only began in the 1930s in the United States and some European countries.

  1. Goods:

Goods are products that satisfy human wants, needs, and desires. Goods can be classified into various categories like:

  • Tangible and Intangible Goods: Goods like grocery, transport, garments that can be touched and felt are tangible goods and goods that cannot be felt or touched like medical, law, engineering, etc.

  • Economic goods are the ones that come at a price and are affected by demand and supply.

  • Non-economic goods are free of cost.

  • People directly consume consumer goods, further classified into non-durable goods like fuel, furniture, garments, etc., and durable like milk, rice, bread, etc.

  • Producer goods are those that help in producing other goods like cotton, jute, machines, etc.

  • Intermediate goods are bought by production units and are resold in different forms: bread, curd, etc.

  • Final goods are produced for final consumption and not for reselling, for example, furniture in the house, food for consumption, etc.

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  1. Income and Output

This is one of the most significant concepts of macroeconomics.

National output is the cumulative amount of goods and services generated during a specific period in a country.

National Income is the cumulative income that is earned by selling these goods and services.

National Output is generally termed as GDP – Gross Domestic Product, which means the income earned from the output produced by a country.

GDP can be affected by upgrades in technology, increase in capital, increase in output and income, acquisition of updated equipment, organizations and units, and much more. This can also be negatively impacted by inflation, market factors, and recession.

  1. Unemployment

Unemployment is the percentage of people without jobs. Unemployment can be further categorized as:

  • Classic – wages are too high to be paid to the employee

  • Structural – mismatch between the required skills and actual skills of an employee

  • Frictional – when it takes a long time to search for an appropriate employee for a job.

  • Cyclical – when the growth of the national economy is stagnant.

  1. Inflation and Deflation

Inflation is when the economy grows too quickly. Deflation is when the economy takes a dive and declines over a period. Both these situations can be harmful to an economy, wherein Inflation leads to negative results and deflation leads to low economic output.

  1. Gross National Product

GNP is the total value of goods and services produced by a country in a specified period. Income earned by residents by foreign individuals is subtracted from the total value. Similarly, income earned by citizens working abroad is added to the total value.

This addition and subtraction of International income differentiate between GNP and GDP.

Fun Fact: Gross National Product is the most common technique to calculate a nation's output, which includes goods and services.

  1. Net National Product

NNP considers the depreciation factor. Depreciation is the wear and tear of fixed assets. It is also the capital used to maintain existing stocks. In simple words:

NNP = GNP – Depreciation.

Also, while calculating NNP, economics subtract the taxes and add the government subsidies granted to encourage the production of goods and services.

Thus, National Income Accounting = NNP – Taxes + Subsidies.

  1. National Disposable Income and Private Income

The national disposable income refers to the total income a country possesses to cater to its consumption and expenditure without having to dispose of any of its assets.

Private income is the net income earned by Residents and individuals. Private income includes income earned privately from abroad, national debt interest, current transfers from government, and net transfers from the rest of the world.

Fun Fact: National Income accounting is an invaluable tool for budget makers and economic planners.

Important Policies Regarding Macroeconomics

Fiscal Policy 

This policy has the power to control the income and expenditure of an economy. This is under the government's direct control and is generally not preferred by economists as Political intentions could influence it. 

Monetary Policy

This policy is controlled by the monetary authority that is the Central Bank. This policy aims to enhance the strength of the country’s currency and to stabilize prices. It also balances the GDP and reduces unemployment. The central bank can buy and sell bonds to circulate wealth and create an equilibrium. This is a much-preferred policy by economists as the controlling power is in the hands of the Central Bank – an independent organization.

How to Calculate National Income Accounting in India?

The National's Economic growth rate is measured by calculating the National Income accounting, and there are several methods to do it:

Income Method

This method focuses on the production of goods and services involving capital, land, labour, etc. Income is generated through interest, profit, rent, wages, etc. Another parameter is mixed-income, which is earned by businessmen and self-employed professionals.

Thus: National Income = Interest + Profit+Rent+Wages+Mixed Income

Solved Example:

Q. Calculate the National Income of country X and identify which of the following is not considered while calculating National Income using the Income Method?

  1. Rent accrued – Rs. 20000

  2. Salaries – Rs. 10000

  3. Sale from secondhand goods – Rs. 5000

  4. Interest earned on Loan – Rs. 10000

Correct Answer: National Income = Interest + Profit+Rent+Wages+Mixed Income

So National Income = 20000+10000+10000 = Rs. 40000.

Option C will not be considered as income generated from land and labour and not from goods. So, option C would not be considered.

Expenditure Method

This method considers the purchases made by Governments, Residents, organizations, etc. The components are:

C = Expense on consumer goods and services by residents and households

G = Expense of the Government on goods and services

I = Expense of the business organizations on capital goods and stocks

NX = Net exports, which mean exports – imports

Thus National Income = C+G+I+NX.

Value Added Method

Under this method, the economy is divided into various industries like transport, communication, agriculture, etc. National Income is calculated by calculating the NVAFC, which is the value-added at each stage. While calculating the same for each industry, we must subtract:

  • Net Indirect Taxes

  • Consumption of Capital

  • Consumption of Raw Materials

Now NVAFC = when it is added for all enterprises.

NDPFC= when NVAFC of industries is added, it is called the net domestic product at factor cost

Finally, the net income from international states should be added.

Thus National Income accounting in India = National Income = (NDPFC) + Net factor income from abroad 

Fun Fact: The National Product and Income are calculated considering value-added tax figures, incomes and expenditure, income and corporation tax returns, and different methods of valuation and definitions. 

Solved Examples

Question 1. Does the GNP consider Depreciation on the production of goods and services?

Correct Answer – No, NNP = GNP – Depreciation. 

Question 2. The market value of all finished goods – Rs. 50000

The market value of all finished services – Rs. 20000

The depreciation of those goods and services – Rs. 10000

Calculate the Net National Product?

Answer: The market value of all finished goods + the market value of all finished services - the depreciation of those goods and services = net national product.

The gross national product - depreciation = net national product.

So, the answer is 50000+20000-10000

NNP = Rs. 60000

FAQ (Frequently Asked Questions)

1. What is the relationship between GDP and Welfare of an economy?

GDP is an annual calculation of the total number of goods and services produced by a country. There are several ways of calculating the GDP of the economy. It doesn't depict the welfare of an economy as a rise in GDP does not mean a rise in the growth of all the people of a nation may have grown; others may have fallen. Also, GDP caters to monetary and nonmonetary situations, so it is not only about money. Finally, the existence of black markets where trading of goods and services is conducted without any monetary transactions is another reason why GDP does not directly impact the welfare of an economy.

2. What is the concept of the price?

Price is the compensation paid for the goods and services bought for consumption or reselling. The prices of a product depend on demand and supply and are referred to as price theory. In a free economy, factors about demand and supply balance out on their own and can be affected by industrial manipulation and Government subsidies. These also affect the prices of goods and services. Price theory constitutes the relation between the demand and supply of a product and its price. If the demand increases and supply remains the same, the price tends to rise of that product. In case of a balance between the demand and supply of a product, the production decreases, and the price becomes stagnant.

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