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Basics of National Income Accounting


Gross Domestic Product

Money value of all final goods and services produced within the domestic territory and valued at market prices in a given time period
Time period Product Money value : typically one year : India 1 April to 31 March : output of goods and services : converting output into a common denominator of money

Need for Money Value

Different commodities measured in different units Addition becomes difficult

(Measured in litres)

(Measured in metres)
(Measured in tonnes)

(Measured in Kgs) Common Unit Money (Rs)

Nominal GDP
GDP (output) is valued at current prices Current prices are the prices prevailing in the year in which production takes place Reflects the change in output due to:
Price changing and / or Quantity of commodities produced changing

Nominal GDP Commodity Output (Yr1) Wheat (kg) Cloth (mt) GDP 20 15

Price (Yr1) 3 5

Value of output 60 75 135

Output (Yr2) 20 15

Price (Yr2) 5 6

Value of output 100 90 190

Nominal GDP
Table shows GDP has increased Output has remained constant in both years Rise in GDP due to rise in price Inflationary trend needs to be discounted to get actual change in availability of goods and services Use of Real GDP

Real GDP
GDP measures at constant prices Value current years output using base year prices Rise in GDP reflects rise in output
Real GDP Commodity Output (Yr1) 20 15 Price (Yr1) 3 5 Value of output 60 75 135 Output (Yr2) 20 15 Price (Yr1) 3 5 Value of output 60 75 135

Wheat (kg) Cloth (mt) GDP

Value of output has remained constant over the years

GDP Deflator
Measures the average price level of all goods and services that constitute GDP in the economy Output is kept constant Nominal GDP GDP Deflator = X 100 Real GDP For year 2 GDP Deflator = 190 135 X 100 = 140.74

On an average prices have risen by 41%

Terms to Understand
Domestic product vs National product Gross product vs Net product Final product vs Intermediate products Market price vs Factor Cost

Domestic Product vs National Product

Domestic Product is the output produced within the economic or domestic territory of a country
Indian High Commission Islamabad Domestic territory Includes :
i. ii. Political boundaries High commissions, embassies military bases located overseas Ships, fishing vessels, air crafts owned by residents Embassies, aid agencies of foreign governments situated in India Offices of international organisations such as World Bank, IMF etc

World Bank Office UK High Commission


Domestic territory excludes :



Indian Airline flying from Kathmandu to Colombo

Normal Resident of a country

Normal Resident is defined as a person who
Ordinarily resides in a country Economic interest lies within the economic territory Resident


Production unit

Resident Citizen
Citizenship based on nationality Resident based on economic interest

Normal Residents of a country

All households in an economy resident households Households = Resident + Non-resident households Non-resident households in a domestic territory include :
Foreign visitors on conferences, vacations, tours Seasonal workers within the domestic territory Diplomats of other countries living within the domestic territory Foreign employees in international organisations Foreign consultants, technicians, engineers who come on projects

Resident households outside the domestic territory include:

Citizens of a country employed in their own embassies, consulates, military bases Medical patients and students (as long as they continue to be a part of a household of their home country) Citizens working in the local offices of international organisations

Domestic Product vs National product

National income is the income earned by residents of an economy Domestic income = income of residents in the domestic territory + income of non-residents in the domestic territory National income = income of residents in the domestic territory + income of residents from abroad National income = Domestic income + net factor income from abroad

Net factor income from abroad (NFIFA)

NFIFA = Factor income earned by residents abroad - Factor income earned by non-residents in the domestic territory
minus Factor income earned by non-residents within the domestic territory
Factor Income

Factor income earned by residents abroad

Factor Income

Indian Security Guard

Factor Services

UK High Comm. Delhi (abroad)

British Security Guard

Indian High Comm., London (domestic Factor territory) Services

Domestic Product vs National Product

Domestic Product = National Product NFIFA National Product = Domestic Product + NFIFA When NFIFA < 0; Domestic Product > National Product When NFIFA > 0; Domestic Product < National Product

Gross Product vs Net Product

Gross product includes depreciation Depreciation
Wear and tear of plant and machinery with use Foreseen obsolescence
New clothes

Also called
Replacement cost Consumption of capital wear and tear

Gross product = net product + depreciation Net product = gross product - depreciation
If Gross product is Rs 200 and Depreciation is Rs 50, then Net product is Rs 150 Faded clothes

Final vs Intermediate Goods

Intermediate Products
Goods and services used for furthering production

Final Products
Goods and services used for directly satisfying the wants of consumers

Tasty Food Restaurant






No good is either intermediate or final Distinction is based on the USE of the good

Problem of Double Counting

Occurs when the value of a commodity is counted more than once in valuing the output of an economy


Sugar Chocolate Yummy Chocolate Factory Rs. 100 Output = Rs. 100

Cocoa Rs. 15 + Rs. 25 + Rs. 10 Input = Rs. 50

Output available is valued at Rs. 100 and not Rs. 150 (50 + 100) Rs. 50 (value of inputs) is already included in Rs. 100 (value of output)

Problem of Double Counting

Leads to overestimation of output Can be avoided by :
taking only final goods and services taking value added at each production process

Farmer Wheat Rs. 20 Value Added 20 0 = 20

Miller Flour Rs. 30 30 20 = 10

Baker Bread Rs. 40 40 30 = 10

Customer Bread Rs. 40

Total value added = 20 + 10 + 10 = Rs. 40 Value of final product = Rs. 40

Product at Market Price vs Product at Factor Cost

Factor Cost + Net Indirect Taxes = Market Prices
Paid to factors of production Paid by households

Indirect Tax Factor Cost: Rs. 100 Sales Tax: 10% Market Price: Rs. 100 + Rs. 10 = Rs. 110

Indirect Tax


Subsidy Subsidy Factor Cost: Rs. 100 Subsidy: 10% Market Price: Rs. 100 - Rs. 10 = Rs. 90

Rs. 100

Rs. 10

Factory Government

Government Rs. 10

Factory Rs. 100

Results in : price

Results in : price

Factor Income vs Transfer Receipts

Factor Income Arise due to the result of productive activity Paid to factors of production Included in national income estimates e.g. : rent, wages, interest, profits Transfer Receipts Do not arise due to any productive activity Not paid to factors of production Excluded from national income estimates e.g. : scholarships to students, old age pension, lotteries, remittances received from abroad