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. National Income National income, however, 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. It can be expressed in either real or nominal terms.
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, gains from re-sales 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 is expressed in terms of either 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 (NDP) 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) on the other hand; 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.
Thus, the relationship between GDP and GNP can be given as follows

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, on the other
hand; refers to the actual cost of the various factors of production and it includes government
grants and subsidies but it excludes indirect taxes.
The relationship between market price and factor cost can be expressed as follows;
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 transfers from the government to individuals for which there no
economic activity is produced in return by these individuals. Examples of transfer are
scholarship, pension, and unemployment benefits.

Personal Income and Disposable Income

Personal Income refers to the income available to individuals where as Disposable

income refers to the income that the individuals can actually spend or save.
Measurement of National Income

There are 3 approaches to measure national income i.e. output approach, income approach
and expenditure approach. Theoretically, the national income calculated from the three
approaches will result into the same value i.e.

Expenditure Output Income

Approach Approach Approach
(i.e. expenditure on goods (i.e. value of goods and (i.e. income earned by
and services produced) = services produced) = factor owners)
However, in practice, these measures are likely not to be equal to one another.

The 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 a 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.
Note: Value of final good and sum of value added at each production stage is to be the same.
This way, double counting or multiple counting of the value of a product at each production
stage is avoided when the value added or final value is used in the computation since the
value of product is counted only once in the value added method or the final value method.
Thus, in computation National Output by the output approach, we are required to find the sum of
value added by each sector in the entire economy, for example:
Agriculture and Fishing
Quarrying
Manufacturing
Utilities Value added
Construction in all these
Commerce sectors
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 (i.e. National Income)

The 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 is such as;

Income from Employment

Income from Self-employment
Gross trading profits of companies The sum of income
Gross trading surplus of public corporations from owners of
Gross trading surplus of general government enterprises factors of production
Rent, Interest and Dividend in the economy
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 (i.e. National Income)

The Expenditure Approach

Expenditure Approach measures national income by adding the private consumption

expenditure, government consumption expenditure, gross fixed capital formation i.e. investment
expenditure, increase in physical stocks and net exports of goods and services. i.e. 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 e.g. 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. The 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

This 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.

Thus, the computation of National Income by Expenditure Approach may include:

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 Business Taxes
Add Subsidies
= GDP at factor cost
Add NPIFA
= GNP at factor cost
Less Capital Consumption
= NNP at factor cost (i.e. National Income)

Some Questions for practice

1. Using the following national income accounting data, compute (a) GDP, (b) NDP, (c) NI.
All figures are in billions of USD.
Category Value

Compensation of employees 194.2

U.S. exports of goods and services 17.8
Consumption of fixed capital 11.8
Government purchases of goods and services 59.5
Indirect business taxes 14.4
Net private domestic investment 52.1
Transfer payments 13.9
U.S. imports of goods and services 16.5
Personal taxes 40.5
Net foreign factor income earned in U.S. 2.2
Personal consumption expenditures 219.1

2. Use the following information as given below;

Category Value ( in 1000 USD)

National income 8,122

Corporate profits 732
Net interest income 650
Contributions for social insurance 726
Personal interest income 1,091
Personal dividend income 409
Government transfer payments to individual 1,137
Personal income taxes 1,292
Consumption 6,987
Interest payments by individuals 205
Required:
Calculate Personal Saving, Personal disposable Income as well as personal Income

3. Use the following information as given below;

Category Value ( in 1000 USD)

Gross National product 10,082

Net factor income from abroad −22
Depreciation 1,329
Indirect business taxes 775
Required:
Calculate GDP and National Income