NATIONAL INCOME

A brief history of the development of the national income

accounts
The frst estimates of national income were made in England by the
politician and economist Sir William Petty in the 17th century. Petty, whose
aim was ta reform, estimated total ependiture as !" million pounds. #e
estimated capital income as 1$ million pounds, obtaining labor income as
a residual %$ million pounds. Toward the end 11 of that century, &regory
'ing made more systematic estimates for the income, sa(ing, and
epense of England for the year 1)**. +n the late 17th and early 1*th
centuries, the ,rench economist Pierre de -oisguillebert, also a ta
reformer, de(eloped crude estimates
of income and consumption in ,rance, followed by more careful estimates
by Sebastien .e Prestre de /auban in 17"7.
These early isolated estimates were based on comprehensi(e notions of
production and output without the beneft of formal economic theori0ing.
1s economic theory emerged, it unfortunately ad(ocated o(erly limited
estimates. The ,rench physiocrats belie(ed that only land produced net
output o(er and abo(e costs, a notion
that in2uenced the chemist 1ntoine3.aurent .a(oisier4s estimates of
,rance4s income in the late 1*th century, made while a commissioner of
the public treasury. The classical economists, beginning with 1dam Smith
and continuing through 'arl 5ar, distinguished the potential for labor to
produce material wealth and thus emphasi0ed the production of goods as
opposed to ser(ices. 6ational income estimates in much of the 17th
century placed their main reliance on commodity production data, which
also dominated the material product accounting of the So(iet3bloc
countries in the %"
th
century.
+n 17%1, it was possible to count nine countries that had comprehensi(e
national income estimates for the year 171!, almost all prepared by
scholars rather than go(ernment o8cials9 of these, only four could be
:udged to be within a probable error of 1" percent. Since that was the year
World War + bro;e out, go(ernments often did not ;now their economic
ability to mobili0e for total war.
1%Ofcial estimates. 6ational income estimates, it became clear, were
useful in anticipating the potential for income taation and for estimating
the potential for national defence production in time of war. The interwar
depression o<ered new reasons for national income estimation= gauging
the course of the economic crisis and measuring the relati(e >pump3
priming? impact of go(ernment ependiture.
-eginning in 17%$ in @anada and Aussia, national go(ernments began to
support ongoing production of o8cial estimates of national income. Simon
'u0nets, whose article on >6ational +ncome? in the 17BB edition of the
Encyclopedia of Social Sciences set forth a highly in2uential conceptual
framewor; and :ustifcation for national income accounting, inaugurated
the CS o8cial annual estimates in 17B! with the publication of National
Income, 1929-32. This publication included not only careful defnitions of
the
concepts used but also line3by3line deri(ations of the tet tables, with
sources and methods.
The publication of The Geneal Theoy of Employment, Inteest and !oney
D17B)E by the -ritish economist Fohn 5aynard 'eynes, which emphasi0ed
the
relationships among consumption, in(estment, and employment, added
further impetus to the de(elopment of national income statistics,
particularly gi(en 'eynes4s acti(e role in go(ernment. +n England, @olin
@lar;4s National
Income and O"tlay D17B7E laid the statistical foundations for the modern
manifold accounting framewor; by bringing together estimates of income,
output, consumption, go(ernment re(enue and ependiture, capital
formation, sa(ing, foreign trade, and the balance of payments. -y 17B7,
o8cial estimates were prepared in nine countries. Aichard Stone in the
17!"s put together the integrated system of accounts much as we ha(e
them today.
THE ST!" O# NATIONAL INCOME IS IM$O%TANT &ECASE O# THE
#OLLO'IN( %EASONS)
To see the economic de(elopment of the country.
To assess the de(elopmental ob:ecti(es.
To ;now the contribution of the (arious sectors to 6ational +ncome.
+nternationally some countries are wealthy, some countries are not
wealthy and some countries are in3between. Cnder such circumstances, it
would be di8cult to e(aluate the performance of an economy.
Performance of an economy is directly proportionate to the amount of
goods and ser(ices produced in an economy. 5easuring national income is
also important to chal; out the future course of the economy. +t also
broadly indicates people4s standard of li(ing.
+ncome can be measured by &ross 6ational Product D&6PE, &ross
Gomestic Product D&GPE, &ross 6ational +ncome D&6+E, 6et 6ational
Product D66PE and 6et 6ational +ncome D66+E.
+n +ndia the @entral Statistical Hrgani0ation has been formulating national
income.
#owe(er some economists ha(e felt that &6P has a measure of national
income has limitation, since they eclude po(erty, literacy, public health,
gender eIuity and other measures of human prosperity.
+nstead they formulated other measures of welfare li;e #uman
Ge(elopment +nde D#G+E
!eterminin* (!$
&GP can be determined in three ways, all of which should in principle gi(e
the same result. They are the product Dor outputE approach, the income
approach, and the ependiture approach.
The most direct of the three is the product approach, which sums the
outputs of e(ery class of enterprise to arri(e at the total. The ependiture
approach wor;s on the principle that all of the product must be bought by
somebody, therefore the (alue of the total product must be eIual to
peopleJs total ependitures in buying things. The income approach wor;s
on the principle that the incomes of the producti(e factors DKproducers,K
colloIuiallyE must be eIual to the (alue of their product, and determines
&GP by fnding the sum of all producersJ incomes.
LBM
Eample= the ependiture method=
G#$ % pi&ate cons"mption ' (oss in&estment ' (o&enment
spendin( ' )e*pots impots+, or
Note) K&rossK means that &GP measures production regardless of the
(arious uses to which that production can be put. Production can be used
for immediate consumption, for in(estment in new fed assets or
in(entories, or for replacing depreciated fed assets. KGomesticK means
that &GP measures production that ta;es place within the countryJs
borders. +n the ependiture3method eIuation gi(en abo(e, the eports3
minus3imports term is necessary in order to null out ependitures on
things not produced in the country DimportsE and add in things produced
but not sold in the country DeportsE.
Economists Dsince 'eynesE ha(e preferred to split the general
consumption term into two parts9 pri(ate consumption, and public
sector Dor go(ernmentE spending. Two ad(antages of di(iding total
consumption this way in theoretical macroeconomics are=
$rivate consumption is a central concern of welfare economics.
The pri(ate in(estment and trade portions of the economy are
ultimately directed Din mainstream economic modelsE to increases in
long3term pri(ate consumption.
+f separated from endogenous pri(ate consumption, *overnment
consumption can be treated as eogenous,
Lcitation neededM
so that di<erent
go(ernment spending le(els can be considered within a meaningful
macroeconomic framewor;.

Income Approach
This method measures &GP by adding the incomes that frms pay
households for the factors of production they hire3 wages for labor,
interest for capital, rent for land and profts for entrepreneurship.
33The CS K6ational +ncome and Ependiture 1ccountsK di(ide incomes into
f(e categories=
1. Wages, salaries, and supplementary labour income
%. @orporate profts
B. +nterest and miscellaneous in(estment income
!. ,armers4 income
$. +ncome from non3farm unincorporated businesses
3Two ad:ustments must be made to get &GP=
1. +ndirect taes minus subsidies are added to get from factor cost to
mar;et prices. %. Gepreciation Dor capital consumptionE is added to get
from net domestic product to gross domestic product
$rivate consumption is a central concern of welfare economics.
The pri(ate in(estment and trade portions of the economy are
ultimately directed Din mainstream economic modelsE to increases
in long3term pri(ate consumption.
+f separated from endogenous pri(ate consumption, *overnment
consumption can be treated as eogenous,
Lcitation neededM
so that
di<erent go(ernment spending le(els can be considered within a
meaningful macroeconomic framewor;.
E+penditure approach
+n contemporary economies, most things produced are produced for sale,
and sold. Therefore, measuring the total ependiture of money used to
buy things is a way of measuring production. This is ;nown as the
ependiture method of calculating &GP. 6ote that if you ;nit yourself a
sweater, it is production but does not get counted as &GP because it is
ne(er sold. Sweater3;nitting is a small part of the economy, but if one
counts some ma:or acti(ities such as child3rearing Dgenerally unpaidE as
production, &GP ceases to be an accurate indicator of production.
Similarly, if there is a long term shift from non3mar;et pro(ision of ser(ices
Dfor eample coo;ing, cleaning, child rearing, do3it yourself repairsE to
mar;et pro(ision of ser(ices, then this trend toward increased mar;et
pro(ision of ser(ices may mas; a dramatic decrease in actual domestic
production, resulting in o(erly optimistic and in2ated reported &GP. This is
particularly a problem for economies which ha(e shifted from production
economies to ser(ice economies.
.
(!$ ,"- is a sum of Consumption ,C-, Investment ,I-, (overnment
Spendin* ,(- and Net E+ports ,. / M-.
" N C O I O ( O ,. M-
#ere is a description of each &GP component=
C ,consumption- is normally the largest &GP component in the
economy, consisting of pri(ate Dhousehold fnal consumption
ependitureE in the economy. These personal ependitures fall
under one of the following categories= durable goods, non3durable
goods, and ser(ices. Eamples include food, rent, :ewelry, gasoline,
and medical epenses but does not include the purchase of new
housing.
I ,investment- includes business in(estment in eIuipments for
eample and does not include echanges of eisting assets.
Eamples include construction of a new mine, purchase of
software, or purchase of machinery and eIuipment for a factory.
Spending by households Dnot go(ernmentE on new houses is also
included in +n(estment. +n contrast to its colloIuial meaning,
J+n(estmentJ in &GP does not mean purchases of fnancial products.
-uying fnancial products is classed as Jsa(ingJ, as opposed
toinvestment. This a(oids double3counting= if one buys shares in a
company, and the company uses the money recei(ed to buy plant,
eIuipment, etc., the amount will be counted toward &GP when the
company spends the money on those things9 to also count it when
one gi(es it to the company would be to count two times an
amount that only corresponds to one group of products.
-uying bonds or stoc;s is a swapping of deeds, a transfer of claims
on future production, not directly an ependiture on products.
( ,*overnment spendin*- is the sum of go(ernment
ependitures on fnal goods and ser(ices. +t includes salaries
of public ser(ants, purchase of weapons for the military, and any
in(estment ependiture by a go(ernment. +t does not include
any transfer payments, such as social security or unemployment
benefts.
. ,e+ports- represents gross eports. &GP captures the amount a
country produces, including goods and ser(ices produced for other
nationsJ consumption, therefore eports are added.
M ,imports- represents gross imports. +mports are subtracted since
imported goods will be included in the terms (, I, or C, and must
be deducted to a(oid counting foreign supply as domestic.
1 fully eIui(alent defnition is that (!$ ,"- is the sum of 0nal
consumption e+penditure ,#CE-, *ross capital formation ,(C#-,
and net e+ports ,. / M-.
" N #CE O (C#O ,. M-
,@E can then be further bro;en down by three sectors
Dhouseholds, go(ernments and non3proft institutions ser(ing
householdsE and &@, by f(e sectors Dnon3fnancial corporations,
fnancial corporations, households, go(ernments and non3proft
institutions ser(ing householdsE. The ad(antage of this second
defnition is that ependiture is systematically bro;en down,
frstly, by type of fnal use Dfnal consumption or capital formationE
and, secondly, by sectors ma;ing the ependiture, whereas the
frst defnition partly follows a mied delimitation concept by type
of fnal use and sector.
6ote that C, (, and I are ependitures on fnal goods and ser(ices9
ependitures on intermediate goods and ser(ices do not count.
D+ntermediate goods and ser(ices are those used by businesses to
produce other goods and ser(ices within the accounting yearE
1ccording to the C.S. -ureau of Economic 1nalysis, which is
responsible for calculating the national accounts in the Cnited
States, =+n general, the source data for the ependitures
components are considered more reliable than those for the
income components
Income approach
1nother way of measuring &GP is to measure total income. +f &GP is
calculated this way it is sometimes called &ross Gomestic +ncome D&G+E,
or &GPD+E. &G+ should pro(ide the same amount as the ependiture
method described abo(e. D-y defnition, &G+ N &GP. +n practice, howe(er,
measurement errors will ma;e the two fgures slightly o< when reported
by national statistical agencies.E
Total income can be subdi(ided according to (arious schemes, leading to
(arious formulae for &GP measured by the income approach. 1 common
one is=
G#$ % compensation of employees ' (oss opeatin(
s"pl"s ' (oss mi*ed income ' ta*es less s",sidies on pod"ction
and impots
(!$ N COE O (OS O (MI O T
$ 1 M
3 S
$ 1 M
Compensation of employees D@HEE measures the total
remuneration to employees for wor; done. +t includes wages
and salaries, as well as employer contributions to social
security and other such programs.
(ross operatin* surplus D&HSE is the surplus due to owners
of incorporated businesses. Hften called profts, although only a
subset of total costs are subtracted from gross output to
calculate &HS.
(ross mi+ed income D&5+E is the same measure as &HS, but
for unincorporated businesses. This often includes most small
businesses.
The sum of COE, (OS and (MI is called total factor income9 it is
the income of all of the factors of production in society. +t
measures the (alue of &GP at factor DbasicE prices. The di<erence
between basic prices and fnal prices Dthose used in the
ependiture calculationE is the total taes and subsidies that the
go(ernment has le(ied or paid on that production. So adding taes
less subsidies on production and imports con(erts &GP at factor
cost to &GPD+E.
Total factor income is also sometimes epressed as=
Total facto income % Employee compensation ' -opoate po.ts
' $opiete/s income ' 0ental income ' Net inteest
L)M
Pet another formula for &GP by the income method is=
Lcitation
neededM
G#$ N 0 O I O $ O S1 O 2
where A = rents
+ = interests
P = profts
S1 = statistical ad:ustments Dcorporate income taes, di(idends,
undistributed corporate proftsE
W = wages
6ote the mnemonic, KripsawK.
1 Kproduction boundaryK that delimits what will be counted as &GP.
KHne of the fundamental Iuestions that must be addressed in preparing
the national economic accounts is how to defne the production boundary
Q that is, what parts of the myriad human acti(ities are to be included in
or ecluded from the measure of the economic production.K
L7M
1ll output for mar;et is at least in theory included within the boundary.
5ar;et output is defned as that which is sold for Keconomically
signifcantK prices9 economically signifcant prices are Kprices which ha(e
a signifcant in2uence on the amounts producers are willing to supply and
purchasers wish to buy.K1n eception is that illegal goods and ser(ices are
often ecluded e(en if they are sold at economically signifcant prices
D1ustralia and the Cnited States eclude themE.
This lea(es non3mar;et output. +t is partly ecluded and partly included.
,irst, Knatural processes without human in(ol(ement or directionK are
ecluded. 1lso, there must be a person or institution that owns or is
entitled to compensation for the product. 1n eample of what is included
and ecluded by these criteria is gi(en by the Cnited StatesJ national
accounts agency= Kthe growth of trees in an unculti(ated forest is not
included in production, but the har(esting of the trees from that forest is
included.
Within the limits so far described, the boundary is further constricted by
Kfunctional considerations.KThe 1ustralian -ureau for Statistics eplains
this= KThe national accounts are primarily constructed to assist
go(ernments and others to ma;e mar;et3based macroeconomic policy
decisions, including analysis of mar;ets and factors a<ecting mar;et
performance, such as in2ation and unemployment.K @onseIuently,
production that is, according to them, Krelati(ely independent and isolated
from mar;ets,K or Kdi8cult to (alue in an economically meaningful wayK
Li.e., di8cult to put a price onM is ecluded. Thus ecluded are ser(ices
pro(ided by people to members of their own families free of charge, such
as child rearing, meal preparation, cleaning, transportation, entertainment
of family members, emotional support, care of the elderly. 5ost other
production for own Dor oneJs familyJsE use is also ecluded, with two
notable eceptions which are gi(en in the list later in this section.
6onmar;et outputs that ae included within the boundary are listed below.
Since, by defnition, they do not ha(e a mar;et price, the compilers of &GP
must imp"te a (alue to them, usually either the cost of the goods and
ser(ices used to produce them, or the (alue of a similar item that is sold
on the mar;et.
&oods and ser(ices pro(ided by go(ernments and non3proft organisations
free of charge or for economically insignifcant prices are included. The
(alue of these goods and ser(ices is estimated as eIual to their cost of
production. This ignores the consumer surplus generated by an e8cient
and e<ecti(e go(ernment supplied infrastructure. ,or eample,
go(ernment3pro(ided clean water confers substantial benefts abo(e its
cost. +ronically, lac; of such infrastructure which would result in higher
water prices Dand probably higher hospital and medication ependituresE
would be re2ected as a higher &GP. This may also cause a bias that
mista;enly fa(ors ine8cient pri(ati0ations since some of the consumer
surplus from pri(ati0ed entitiesJ sale of goods and ser(ices are indeed
re2ected in &GP.
&oods and ser(ices produced for own3use by businesses are attempted to
be included. 1n eample of this ;ind of production would be a machine
constructed by an engineering frm for use in its own plant.
Aeno(ations and up;eep by an indi(idual to a home that she owns and
occupies are included. The (alue of the up;eep is estimated as the rent
that she could charge for the home if she did not occupy it herself. This is
the largest item of production for own use by an indi(idual Das opposed to
a businessE that the compilers include in &GP.+f the measure uses
historical or boo; prices for real estate, this will grossly underestimate the
(alue of the rent in real estate mar;ets which ha(e eperienced signifcant
price increases Dor economies with general in2ationE. ,urthermore,
depreciation schedules for houses often accelerate the accounted
depreciation relati(e to actual depreciation Da well built house can be li(ed
in for se(eral hundred years 3 a (ery long time after it has been fully
depreciatedE. +n summary, this is li;ely to grossly underestimate the (alue
of eisting housing stoc; on consumersJ actual consumption or income.
1gricultural production for consumption by oneself or oneJs household is
included.
Ser(ices Dsuch as cheIueing3account maintenance and ser(ices to
borrowersE pro(ided by ban;s and other fnancial institutions without
charge or for a fee that does not re2ect their full (alue ha(e a (alue
imputed to them by the compilers and are included. The fnancial
institutions pro(ide these ser(ices by gi(ing the customer a less
ad(antageous interest rate than they would if the ser(ices were absent9
the (alue imputed to these ser(ices by the compilers is the di<erence
between the interest rate of the account with the ser(ices and the interest
rate of a similar account that does not ha(e the ser(ices. 1ccording to the
Cnited States -ureau for Economic 1nalysis, this is one of the largest
imputed items in the &GP.
L1)M
(!$ vs (N$
&GP can be contrasted with *ross national product D(N$E or *ross
national income D(NIE. The di<erence is that &GP defnes its scope
according to location, while &6P defnes its scope according to ownership.
&GP is product produced within a countryJs borders9 &6P is product
produced by enterprises owned by a countryJs citi0ens. The two would be
the same if all of the producti(e enterprises in a country were owned by
its own citi0ens, but foreign ownership ma;es &GP and &6P non3identical.
Production within a countryJs borders, but by an enterprise owned by
somebody outside the country, counts as part of its &GP but not its &6P9
on the other hand, production by an enterprise located outside the
country, but owned by one of its citi0ens, counts as part of its &6P but not
its &GP.
To ta;e the Cnited States as an eample, the C.S.Js &6P is the (alue of
output produced by 1merican3owned frms, regardless of where the frms
are located. Similarly, if a country becomes increasingly in debt, and
spends large amounts of income ser(icing this debt this will be re2ected
in a decreased &6+ but not a decreased &GP. Similarly, if a country sells
o< its resources to entities outside their country this will also be re2ected
o(er time in decreased &6+, but not decreased &GP. This would ma;e the
use of &GP more attracti(e for politicians in countries with increasing
national debt and decreasing assets.
&ross national income D&6+E eIuals &G+ plus income receipts from the rest
of the world minus income payments to the rest of the world.
+n 1771, the Cnited States switched from using &6P to using &GP as its
primary measure of production.
!i2culties in Calculation of National Income
+n +ndia there are (arious di8culties in calculating the national incomes
.The most se(ere one is the fnding of reliable data. 5ost of the time, it is
based on assumptions. Soon after independence the 6ational +ncome
@ommittee was formed to collect data and estimate 6ational +ncome. The
two ma:or problems which remain in the calculation of 6ational +ncome
are=
E(en if current data are a(ailable then (alues are underreported.
/+FET# C.T.
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