NATIONAL INCOME ACCOUNTING National income accounting refers to a set of rules and techniques that are used to measure

the national income of a country. Singapore follows the concepts and methodology recommended in the United Nations publication A system of National Accounts, 1968 for the compilation of national figures. This is to ensure that Singapore national statistics will be consistent and compared with other countries. National Income National income is a measure of the value of goods and goods produced by the residents of an economy in a given period of time, usually a quarter or a year. National income can be real or nominal. Nominal national income refers to the current year production of goods and services valued at current year prices. Real national income refers to the current year production of goods and service valued at base year prices. In estimating national income, only productive activities are included in the computation of national income. In addition, only the values of goods and services produced in the current year are included in the computation of national income. Hence, gain from resale are excluded but the services provided by the agents are counted. Similarly, transfer payments are excluded as there is income received but no good or service produced in return. However, not all goods and services from productive activities enter into market transactions. Hence, imputations are made for these non-marketed but productive activities eg imputed rental for owner-occupied housing. Thus, national income refers to the market value or imputed value of additional goods and services produced and services performed in the current period. GDP, GNP, NDP and NNP National income in many countries are either in Gross Domestic Product (GDP) or Gross National Product (GNP). Gross Domestic product (GDP) refers to the total value of goods and services produced within the geographical boundary of a country before the deduction of capital consumption. Net Domestic product (NPD) refers to the total value of goods and services produced within the geographical boundary of a country after the deduction of capital consumption. Gross National Product (GNP) refers to the total value of goods and services produced by productive factors owned by residents of the country both inside and outside of the country before the deduction of capital consumption. Net National Product (NNP) ) refers to the total value of goods and services produced by productive factors owned by residents of the country both inside and outside of the country after the deduction of capital consumption.

Relationship between GDP and GNP GNP = GDP + NPIFA (Net Property Income from Abroad) Net Property Income from abroad refers to the difference between income from abroad and income to abroad. Market Price and Factor Cost Market price refers to the actual transacted price and it includes custom duty, excise duty and other indirect taxes but it excludes government grants and subsidies. Factor cost refers to the actual cost of the various factors of production and it includes government grants and subsidies but it excludes indirect taxes. Relationship between market price and factor cost GNP at factor cost = GNP at market price indirect taxes + subsidies GDP at factor cost = GDP at market price indirect taxes + subsidies Transfer Payments Transfer payment refers to government to individuals for which there no economic activity is produced in return by these individuals. Examples of transfer are scholarship, pension. Personal Income and Disposable Income Personal Income refers to the income available to individuals. Disposable income refers to the income that the individuals can actually spend or save. National Income (NNP at factor cost) Less Retained earnings, company taxes Add transfer Payments Personal Income Less CPF, CDAC Disposable Income Measurement of National Income There are 3 approaches to measure national income ie output approach, income approach and expenditure approach.

Theoretically, the national income calculated from the 3 approaches are the same ie Expenditure Approach Expenditure on goods and services $100m Spent = = Output Approach Value of goods and services produced $100m worth of goods and services produced = Income Approach Income Earned by factor owners = Income of $100m

Hence, GDE = GDP + GDI, GNE = GNP = GNI, NDE = NDP = NDI, NNE = NNP +NNI.. But in practice, these measures are usually not equal to one another. Output Approach Output approach measures national income by adding the total value of the final goods and services produced in the year or by adding the value added by each sector of the economy. Value added Value added refers to the difference between the value of gross output of all goods and services produced in a given period and the value of intermediate inputs used in the production process during the same period. In distributive trade, value added is the difference between the gross margin and the cost of intermediate inputs. In the banking sector, value added is the difference between the sum of actual and imputed bank service charges and intermediate inputs. For government services and non-profit institutions, value added is the wages and salaries, and depreciation allowance set aside for consumption of fixed capital. An example on the computation of value added Production Stage Intermediate Goods Wheat Flour Wholesale Bread $0.20 $0.45 $0.95 $0.00 $0.20 $0.45 = $0.20 = $0.25 = $0.50 Value of Sale Costs of Output from previous production stage Value Added

Final Good Retail Bread $1.25 $0.95 = $0.30

Sum of value added at each production stage

= $1.25

Note : Value of final good and sum of value added at each production stage is the same ie $1.25. Double counting or multiple counting of the value of wheat at each production stage is avoided when the value added or final value is used in the computation as the value of wheat is counted only once in the value added method or the final value method. Computation National Output by output approach ie sum of value added by each sector in the economy) Agriculture and Fishing Quarrying Manufacturing Utilities Construction Commerce Transport and Communication Financial and Business Services Other Services eg Government Departments and Statutory Boards Statistical Discrepancies GDP at factor cost Add NPIFA GNP at factor cost Less Capital Consumption NNP at factor cost (National Income) Income Approach Income approach measures national income by adding the income earned by the factor owners that are residents of the country, undistributed company profits and government income from economic participation. It excludes transfer payments and stock appreciation because transfer payments and stock appreciation are not due to goods and services performed. Computation of National Income by Income Approach Income from Employment Income from Self-employment Gross trading profits of companies Gross trading surplus of public corporations Gross trading surplus of general government enterprises Rent, Interest and Dividend

Imputed rent for owner-occupied houses Total Domestic Income Less Stock Appreciation GDP at factor cost Statistical Discrepancies Add NPIFA GNP at factor cost Less Capital Consumption NNP at factor cost (National Income) Expenditure Approach Expenditure Approach measures national income by adding the private consumption expenditure, government consumption expenditure, gross fixed capital formation ie investment expenditure, increase in physical stocks and net exports of goods and servces ie the difference between exports and imports. It only includes expenditure on goods and services to satisfy the needs of final buyers. It excludes expenditure on intermediate of goods and services. Moreover, resale of consumer and capital goods are excluded because the expenditures are on these resale goods, not goods produced in the current period and hence expenditures on resale goods are not counted. Private Consumption Expenditure Private consumption expenditure refers to the final purchases of goods and services by households. It includes expenditure on single use consumption or non-durable goods eg food, durable goods eg TV, washing machines, and services eg hairdressing services and medical services. Household purchases of new houses are treated as investment expenditure and hence residential investments are not included in private consumption expenditure. Instead residential investments are included in investment expenditure. Resale of consumer durables eg second hand TV are excluded as the expenditures are on second hand TV, not TV produced in the current year and hence expenditures on second hand TV are not included in the private consumption expenditure. Government Consumption Expenditure / General Government Expenditure Government consumption expenditure refers to the cost of running the various government departments an public non-profit organizations to provide goods and services for the public. It excludes the expenditure by government on grants, interest subsidies, transfer payments, loans and repayments.

Gross Domestic Fixed Capital Formation / Investment Expenditure Investment expenditure refers to the expenditure on equipments and machinery, residential and non-residential construction, and changes in inventories. An increase in inventories is treated as an investment and a fall in inventories is treated as disinvestment. Resales of capital goods are excluded from investment expenditure. Gross Investment = Net Investment + Replacement Investment Gross investment refers to the new capital goods produced that can be used to the capital stock or to replace the existing worn-out capital goods. Net Investment refers to the new capital goods that are added to the capital stock. Replacement investment refers to the new capital goods that are used to replace the existing worn-out capital goods. Net Exports of Goods and Services Net exports of goods and services refers to the difference between the exports of goods and services and imports of goods and services. Exports of goods and services refers to goods and services that are produced in the country but they are sold to foreigners for their consumption. Imports of goods and services refer to goods and services that are produced by other countries but they are consumed within the country. Computation of National Income by Expenditure Approach Private Consumption Expenditure Government Consumption Expenditure Gross Domestic Fixed Capital Formation / Investment Expenditure Value of Increase in Inventories and Work-in-Progress Total Domestic Expenditure Add Exports of Goods and Services Total Final Expenditure Less Imports of Goods and Services Statistical Discrepancies GDP at market price Less Indirect Taxes Add Subsidies GDP at factor cost Add NPIFA GNP at factor cost Less Capital Consumption NNP at factor cost (National Income)

GDP Deflator GDP deflator refers to a price index that shows the average increase in prices of all goods and services produced in the current year as compared to that of a base year. The GDP deflator is used to convert the current year nominal GDP into current year real GDP. Economic growth of a country is calculated by the changes in the real GDP of 2 different years or quarters. Current Year GDP At base year prices = (ie current year real GDP) Current Year GDP at current year prices ie current year nominal GDP --------------------------------------------------------------- X 100 Current Year GDP Deflator

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