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Wednesday, March 19, 2025

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NATIONAL INCOME ACCOUNTING

ಪುಂಡಲೀಕ.ಆರ್.ಯಾದವ್, ಡಿಜಿಟಲ್‌ ಕಂಟೆಂಟ್‌ ಪ್ರೊಡ್ಯೂಸರ್ Wednesday, March 19, 2025

NATIONAL INCOME ACCOUNTING

(📢 ಶೈಕ್ಷಣಿಕ ಮತ್ತು ಉದ್ಯೋಗ ಮಾಹಿತಿ ಉದ್ದೇಶ ಮಾತ್ರ! 📚)

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National Income Accounting is used to measure the economic activity in the national economy as a whole. Some of the metrics used for this purpose are:

Gross Domestic Product (GDP)
Net Domestic Product (NDP)
Gross National Product (GNP)
Net National Product (NNP)
Gross National Income (GNI)
Net National Income (NNI)

Key Concepts:

GDP (Gross Domestic Product): It measures the value of final goods and services produced within a geographic boundary regardless of the nationality of the individual or firm. For instance, cars manufactured in India by a Japanese company will be included in Indian GDP.
Real GDP: It refers to the current year production of goods and services valued at base year prices. Such base year prices are constant prices. It is a better way to calculate GDP because, in a particular year, GDP may be bloated due to a high rate of inflation.
Nominal GDP: It refers to the current year production of final goods and services valued at current year prices.
NDP (Net Domestic Product): It is the GDP calculated after adjusting the value of depreciation.
- Formula: NDP = GDP - Depreciation
GNP (Gross National Product): It measures the value of output produced by the nationals of a country, irrespective of geographical boundaries.
- Formula: GNP = GDP + Net Factor Income from Abroad
- In India’s case, GNP is lower than GDP as net income from abroad has always been negative.
NNP (Net National Product): It is the GNP calculated after adjusting the value of depreciation.
- Formula: NNP = GNP - Depreciation
- Note: NNP is always lesser than GNP because depreciation can never be reduced to zero.
National Income (NI): It is a measure of the sum of all factor incomes earned by the citizens of a country (whether within the country or abroad).
- Formula: NI at Factor Cost = NNP at Market Price - Indirect Taxes + Subsidies
Personal Income (PI): It includes all income (including transfer payments) received by individuals in a year.
- Formula: PI = NI + Transfer Payments - (Corporate Retained Earnings, Income Taxes, Social Security Taxes)
Disposable Personal Income (DPI): It refers to the amount available at the disposal of individuals to spend as they like.
- Formula: DPI = PI - Personal Taxes
- DPI = Consumption + Savings
Factor Cost (FC): It refers to the cost of all factors of production used or consumed in producing goods and services.
- Formula: FC = Market Price - Net Indirect Taxes
- Where Net Indirect Taxes (NIT) = Indirect Taxes - Subsidies
- Thus, Factor Cost = Market Price - Indirect Taxes + Subsidies
Market Price (MP): It refers to the actual transacted price of goods and services.
Transfer Payments: It refers to payments made by the government to individuals for which there is no economic activity produced in return by these individuals.
- Examples: Old age pensions, scholarships, etc.

Components of National Income:

Personal Consumption + Personal Saving or Personal Disposable Income (DPI)

+ Direct Personal Tax
+ Miscellaneous fees and fines paid by households / Miscellaneous Receipts of the Government

Personal Income

Corporate profit tax

Undistributed corporate profit

Private Income

NFIA

Interest on National debt

Current transfers from Govt.

Current transfer from R.O.W (NET)

Domestic Factor Income Accruing to Private Sector

Income from property entrepreneurship accruing to government administrative department

Saving of non-department enterprises

Domestic Income

NFIA

National Income

Measurement of National Income in India by National Statistical Office (NSO):

Value Added Method (or Product Method)

Income Method

Expenditure Method

1. Value Added Method:

Under this method, GDP is calculated at market prices, which is the total value of outputs produced at different stages of production. It focuses on the supply side of the product.

Goods and Services Included in Production:

a) Goods and services sold in the market
b) Goods and services not sold but supplied free of cost
c) Services provided by the agents

Goods and Services Not Included in Production:

a) Purchase and sale of second-hand items
b) Production due to illegal activities
c) Non-economic goods such as air and water
d) Transfer payments such as scholarships, pensions, etc.

Income Method:

This approach focuses on aggregating the payments made by firms to households, called factor payments. It focuses on the demand side of the product.

Factors of Production & Types of Factor Incomes:

Land → Rent
Labour → Wages
Capital → Interest
Entrepreneurship → Profit

Formula:
GDP = Wages + Interest + Rent + Profit + Dividend + Indirect Taxes - Subsidies + Depreciation

Expenditure Method:

The expenditure method measures the final expenditure on GDP. It is the total spending on currently-produced final goods and services in an economy.
This final expenditure is made up of the sum of four expenditure items, namely:

Gross Domestic Product (GDP) Formula:

GDP = C + I + G + (X - M)

Consumption Expenditure (C):
- It is the personal consumption made by households. Payments are made by households directly to the firms.
Investment Expenditure (I):
- Investment is an addition to the capital stock of an economy in a given time period.
- It includes investments by firms as well as government sectors.
Government Expenditure (G):
- It includes the value of goods and services purchased by the government.
- Government expenditure on pension schemes, scholarships, unemployment allowances, etc., is not included as they come under transfer payments.
Imports (M):
- Expenditure on foreign-made products (Imports) is expenditure that escapes the system.
Exports (X):
- It is the expenditure by other economies on our production (Exports).

Circular Flow of Economy:

(Refers to the movement of income, goods, and services between households, firms, and the government in an economy.)

Base Year:

A base year is the year used as the beginning or the reference year for constructing an index.
It is usually assigned an arbitrary value of 100.

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