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NATIONAL INCOME

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MEASURING THE PRODUCTION , INCOME & SPENDING OF THE NATION

National Income Accounting represents the tools and methods by which economists and policy makers measure economic activity and economic growth over time. To assess the overall consumption and investment demand generated over a period of time and standard of living of the population of a country, estimation of national income is pertinent.

National Income represents the total value of the final goods and services produced by an economy over a period of time (normally
a year).
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Measurement of National Income

Value added Approach

Income Approach

Expenditure Method

Value Added Approach (Net Product Approach) Value Added by the Firm = Value of the output produced by the firm value of intermediate products used by the firm Value added in the economy= Sum total of value added by all the firms in the Economy Note: only current production of goods and services is taken into consideration. Sale of second hand goods is excluded.

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INCOME APPROACH or FACTOR INCOME METHOD Sum total of the earnings that the factors of production ( land, labour, capital and entrepreneur) receive in the form of rent, wages, interest and profits from the production of current goods and services. Total Income = ( Wages + Rent+ Interest+ profit ) + mixed income of self employed

Excluded:
Transfer receipts Income from sale of second-hand goods Interest on loan for consumption Income from illegal activities Income from capital gains

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Expenditure Method Y= C+ I + G+ X M National Income= Consumption exp. + Investment exp.+ Govt. exp+ Net Exports C :Spending by households on final goods and services I : (Business fixed investment + Residential fixed investment+ Inventories) Depreciation G:- Exp. on goods and services purchased by the Govt. Net Exports:- Exports Imports Excluded:

Expenses in form of transfer payments Exp. On second hand commodities Exp. On Intermediate goods

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Useful relationships to understand the nature of different aggregates of national income:

GROSS & NET:

Net Product = Gross product Depreciation

DOMESTIC PRODUCT & NATIONAL PRODUCT: National Product = Domestic Product + Net Factor Income from Abroad PRODUCT AT MARKET PRICES & PRODUCT AT FACTOR COST: Product at Factor Cost = Product at Market Price Net Indirect Taxes
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STANDARD MEASURES OF INCOME AND OUTPUT Gross National Product Gross Domestic Product Net National Product Net Domestic Product Per Capita Income Personal Disposable Income (GNP) (GDP) (NNP) (NDP) (PCI) (PDI)

In India, the Central Statistical Organization ( CSO ) regularly compiles and publishes the National Account Statistics.

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Gross Domestic Product at Market Price GDPMP: Sum total of the money value of all final good and services produced in the Domestic territory of a country during a year. Gross National Product at Market Price GNPMP : GNPMP = GDPMP + Factor Income earned by normal residents abroad factor income earned by non-residents in domestic territory Net Domestic Product at Market Price: NDPMP= GDPMP Depreciation

Net National Product at Market Price:

NNPMP= GNPMP Depreciation Or NNPMP = NDPMP + NFIA
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Gross Domestic Product at Factor Cost: GDPFC= GDPMP- Indirect Taxes+ subsidies Net Domestic Product at factor cost: NDPFC= GDPFC - Depreciation

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Needs for the study of National Income : To measure the size of the economy and level of countrys 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
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Needs

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 peoples living standards.

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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 occurs 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.

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Problems

House Hold Services : It ignores domestic work and house keeping services

Social Services : It ignores volunteer and unpaid social services. (Mother Teresas social service)
Environment Cost : It does not distinguish between environmental-friendly and environmental-hazardous industries cost of polluting industries is not included in the estimate.
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