National Income Accounting

National Income Estimation Economic performance Economic analysis Forecasting Indicator of Nation’s Economy As a means of indicating changes in a country’s standard of living To indicate changes in economic growth of a country As a means of comparing the economic performance of different countries

World Bank 2005 Up to US $ 875 = Low income countries US $ 876 – US $ 3465 = Lower Middle US $ 3466 – US $ 10725 = Upper Middle More than US $ 10726 = high income

Measurement of National Income Income Approach  NNP at factor cost OR National Income Output Approach  GDP at factor cost Expenditure Approach  GDP at market Prices

Expenditure Approach C+I+G+X-M GDP at market price - Indirect sales tax + Indirect subsidies  GDP at factor cost Net income from abroad GNP at factor cost Depreciation NNP at factor cost  Output Approach Factor Income-from abroad Factor Income paid abroad  Income Approach  W+I+R+P

Expenditure Approach C+I+G+X-M GDP at market price - Indirect sales tax + Indirect subsidies  GDP at factor cost Net income from abroad GNP at factor cost Depreciation NNP at factor cost  Output Approach Factor Income-from abroad Factor Income paid abroad  Income Approach  W+I+R+P

Income Approach W+I+R+P = NNP at factor cost Profits are stated net of depreciation / capital consumption allowances If the figures exclude net income from abroad, NDP at factor cost can be obtained. NDP at factor cost + Net income from abroad =

Output Approach The total value of the final goods and services produced by the primary / secondary / tertiary industries In order to avoid double counting, the value-added method is adopted to exclude intermediate goods. GDP at factor cost + Indirect Taxes – Indirect Subsidies = Distinguish between Indirect / Direct / Business / Personal Taxes

Expenditure Approach People spend their income. Thus, the total expenditure on final goods and services must be equal to the total value of final goods and services produced domestically. Any output that is not sold to consumers is bought by producers in the form of unintended inventory investment. C+I+G+(X-M) = Aggregate / Total expenditure

Items excluded from National Income Accounting Second-hand goods Intermediate goods Non-marketed goods / services Volunteer work / Housework Unreported / Illegal market transactions

Merits & Uses of National Income Statistics Reflecting & comparing the standards of living of different countries Per capita real GNP  standard of living Providing information to the government and firms for economic planning Reflecting the economic growth of a country % change in real GNP over a period of time

Limitations of National Income Statistics Factors that may understate the standard of living / the welfare Exclusion of the value of leisure Same Q produced with fewer working hours  higher welfare Exclusion of non-marketed / unreported transactions

Limitations of National Income Statistics Factors that may overstate the standard of living / the welfare Undesirable Side-effects of Production Air pollution / traffic congestion /… Understate the real / social costs to society  externality /divergence between social costs & private costs

National Income concepts GDP at Market Price GDP at Factor Cost GNP at Market Price GNP at Factor Cost NDP at Market Price NDP at Factor Cost NNP at Market Price NNP at Factor Cost Personal Income Disposable Income

GNP mp GDP NNP fc NDP NNP mp - depreciation -net income from abroad -net indirect taxes

National Income Estimates in India

Thanks