MEANING

National Income Accounting is a method of preparing and

presenting national income accounts based on the principle of
double entry system of business accounting. Macroeconomics
deals with the study of aggregates covering the entire
economy A framework of measurement procedures is
required to find these aggregates. National income accounting
facilitates the measurement of macro aggregates.
According to D.C. Colander, “National income accounting is a
set of rules and definitions for measuring economic activity in
the aggregate economy.” It tries to summarise the
performance of an economy by measuring national income
aggregates in a year. It provides the standards by which
economic activity of a country could be assessed.
It is on the basis of this appraisal that a government forms its
policies and programmes to maximise material welfare of the
people. And this is the basic purpose of national income
accounting. Structure of the macro economy is given by the
circular flow of income and output. National income
accounting has its foundation in circular flow model.
(b) Functions:
Basic functions of national income accounting are
mainly two:
ADVERTISEMENTS:

(i) To identify specific economic achievements of a country

and
(ii) To provide an objective basis of evaluation and review of
policies under implementation.
The data so arrived at enables us to understand, analyse and
interpret the working of an economy. That is why the subject
of macroeconomics should begin with a study of national
income accounting.
(c) Main Uses of National Income Accounting:
These are as under:
(i) It indicates performance of the economy signifying
economy’s strength and failures.
(ii) It helps to find out structural changes in the economy For
instance, in India, proportional share of primary (agricultural)
sector in national income is declining whereas those of
secondary (industrial) sector and tertiary (services) sector are
rising.
(iii) It reflects how national income is shared among various
factors of production. In this context, it is especially helpful to
trade unions in making rational analysis of remuneration that
the labour is getting.
(iv) It helps in making comparison among nations in respect
of national income and per capita income which lead us to
make suitable changes in plans and approaches to achieve
rapid economic development.
(v) National income statistical data reflect the specific
contribution of individual sectors and their growth over time.

ADVERTISEMENTS:

(vi) It is helpful to UNO which formulates welfare plans for

different countries, especially for underdeveloped and
developing countries.
(vii) It has several uses for economic policy and research.
Simply put, national income data, in a way, is manifestation of
material results of human activity in an economy. National
income accounting demands an understanding of the
structure of the macro economy which is exposed through a
Circular Flow of Income and Product.
India's Net National income is 134.86 lakh crore during 2016-17.

There are three methods to calculate Nation Income :

In the First method, it is straightway the national output that is evaluated.

In the Second method, it is the income accuring from production and sale of
goods and services which is accounted for.

And in the Third method, it is the expenditure on these goods and services
which is estimated.

What method does India follow and why?

In our country, the expenditure method is to be simply ruled out because

information about a large part of personal expenditure that takes place on
account of households is difficult to get but Government and large private
firms expenditure data is available

In case of the income method, the difficulty is no doubt less. On the one hand,
the corporate income statistics are readily available but, it constitutes a very
small part of the total income.

On the other hand, in case of agriculture,which constitutes large part of

income but , For large numbers of agricultural producers do not keep
accounts, nor are they taxed for income obtained from agriculture.

In ease of the output method, the country is not so badly placed because
statistics about production and prices of quite a number of goods and services
are available. Hence the output method can be usefully employed for
estimating the output of any sector of the economy.

In the case of India, therefore, output method seems to be more appropriate.

But to improve upon the credibility of net output estimates, it is essential that
it should be combined with the income method and expenditure method for
sectors where the latter can be more effectively used.

So in India given problem of Indequate statistics and large scale unorganised

sector National income is calculated by combination of these three methods .

Formula

The National income is also called Net National Product at factor cost.

NI = NNP at market cost — Indirect tax + subsidies

Note: India officially used to calculate it's national income at factor cost .
Since January 2015 , the CSO has switched over to calculating it at market
price or market cost

Central statistical organization ( CSO) calculates the National income of

India

Income can be measured by Gross National Product (GNP), Gross Domestic

Product (GDP), Gross National Income (GNI), Net National Product (NNP)
and Net National Income (NNI).

In India the Central Statistical Organization has been formulating national

income.

However some economists have felt that GNP has a measure of national
income has limitation, since they exclude poverty, literacy, public health,
gender equity and other measures of human prosperity.

Instead they formulated other measures of welfare like Human Development

Index (HDI)

Calculating National Income

There are various methods for calculating the national income such as
production method, income method, expenditure method etc.

Production Method
The production method gives us national income or national product based on
the final value of the produce and the origin of the produce in terms of the
industry.

All producing units are classified sector wise.

  Primary sector is divided into agriculture, fisheries, animal
husbandry.
 Secondary sector consists of manufacturing.
 Tertiary sector is divided into trade, transport, communication,
banking, insurance etc.
Income Method:
Different factors of production are paid for their productive services rendered
to an organization. The various incomes that includes in these methods are
wages, income of self employed, interest, profit, dividend, rents, and surplus
of public sector and net flow of income from abroad.

Expenditure Method:
The various sectors – the household sector, the government sector, the
business sector, either spend their income on consumer goods and services or
they save a part of their income. These can be categorized as private
consumption expenditure, private investment, public consumption, public
investment etc.

Difficulties in Calculation of National Income

In India there are various difficulties in calculating the national incomes .The
most severe one is the finding of reliable data. Most of the time, it is based on
assumptions. Soon after independence the National Income Committee was
formed to collect data and estimate National Income. The two major problems
which remain in the calculation of National Income are:

 Most of the data is not from the current year.

 Even if current data are available then values are under reported.
 The estimates of national income of a country obtained by adopting the
three methods of measuring national income should produce the same
figure. This is because it is the same thing – final goods and services –
which is being looked at from three different angles.

 In the first method, it is straightway the national output that is

evaluated.

 In the second method, it is the income accruing from production and

sale of goods and services which is accounted for.

 And in the third method, it is the expenditure on these goods and

services which is estimated.

 It should, however, be noted that in practice there is a possibility of

discrepancy being found among the three estimates. This may be
 because statistics of certain items to be included in national income are
not available, or certain items may escape the estimator’s notice.

 In such cases, suitable adjustments are made in the estimates. Each one
of the three methods is useful, the utility depending upon the problem
being analysed. The best thing for a country then is to have estimates
based on all these methods. In case this is not possible, national income
of a country can be estimated by either of the three methods, or a
combination of these.

 Which of these methods of measuring national income is most suitable

for a country depends upon its level of development and the availability
of data. In advanced countries, where data required for using all the
three methods are available, all the methods are used at the same time
to compute national income. Estimation from the three angles makes it
possible to compare the three estimates and also helps to analyse
problems for different purposes. This however is not simply possible in
India.

 In this country, the expenditure method is to be simply ruled out

because information about a large part of personal expenditure that
takes place on account of households is difficult to get. In case of the
income method, the difficulty is no doubt less. But even this method
cannot be used as the only one. On the one hand, in an underdeveloped
country like India, the corporate income for which statistics are readily
available constitutes a very small part of the total income.

 On the other hand, in case of agriculture, which accounts for a

substantial part of national income, it is not possible to get correct
income figures. For large numbers of agricultural producers do not keep
accounts, nor are they taxed for income obtained from agriculture.

 It is, therefore, not possible to collect income data either directly from
producers or indirectly from the tax department. In ease of the output
method, the country is not so badly placed because statistics about
production and prices of quite a number of goods and services are
available. Hence the output method can be usefully employed for
estimating the output of any sector of the economy.

 In the case of India, therefore, output method seems to be more

appropriate. But to improve upon the credibility of net output estimates,
it is essential that it should be combined with the income method for
sectors where the latter can be more effectively used. For example, in
 agriculture, there is no alternative but to use the output method. But in
some segments of the non-agriculture sector, like professions, the
income method can be used. The combination of these two methods is
thus the natural consequence of the present economic situation of the
country.

 Procedure of Estimation of India’s National Income:

 We may now describe the procedure adopted in estimating India’s

national income. The principal aspects of estimation relate to the
selection of methods applicable to the various sectors, collection of
information and sectoring of the economy.

 Method:

 In the combination of a mixed method, both the output method and the
income method have been used. The output method has been used
largely in the commodity producing sectors like agriculture and
manufacturing.

 The income method has been used in the tertiary or service sector like
government and banking, etc. The income method has also been applied
to commodity sectors where it is very difficult to obtain net output data.

 In using the output method in India, the “value added” approach has
been adopted. We know that the “value added” is equal to the value of
goods minus the cost of production. In other words, this concept
measures the net contribution to national income of a producing unit.

 The sum total of values added by all the producing units in the
commodity sector gives the value of this sector’s contribution to national
income.

 The estimation is done by evaluating the value of goods at ex-factory

prices and deducting from it the values of such elements of costs as cost
of inputs and intermediate goods and services supplied by other
enterprises as also the estimated value of capital consumption, i.e.,
depreciation. In the income method, the procedure is to find out the
number of people working in a profession, and their per head earnings.

 The two are then multiplied to get the total value of income contributed
by the profession. But in respect of construction the commodity-flow
approach has been adopted. It envisages estimation of the value of
 domestic production of the commodities used in construction and
adjusting the same for changes in stocks, import and exports.

 Data:

 If the value-added approach is adopted, the data required for the output
method should be about production, prices, and cost of production. For
the income method, statistics about the number of persons employed in
different professions and their earning are needed.

 In India the information under these methods has been collected from
various sources. These sources include government agencies like
ministries, departments and directorates. These agencies publish data
on agriculture, industries, trade, income-tax, revenues, etc., in various
bulletins and publications more or less on a continuous basis.

 There are then National Sample Surveys supplying data on specific

subjects. Moreover, reports like those of the Rural Credit Survey, Indian
Rural Debt and Investment Survey have been made use of. Further,
various censuses of population have also been used to estimate the work
force in the absence of comprehensive employment statistics in various
professions.

 Since adequate and up-to-date data on output and costs are not
available in case of certain goods and services, arbitrary imputations are
made. In some cases, even data emanating from field surveys and local
inquiries are made use of for estimating certain costs.

 Sectors:

 The Central Statistical Organisation (CSO) which has the responsibility

of preparing national income estimates has divided the economy into 13
sectors, grouped under five main headings. It prepares the estimate of
net domestic product. To this is added the net income from abroad to
get the estimate of national product or national income.

 These sector headings with the sub-sectors belonging to each

are as follows:

 1. Primary:

 (i) Agriculture;

 (ii) forestry and logging;

 (iii) fishing; and

 (iv) mining and quarrying;

 2. Secondary:

 (v) manufacturing, subdivided into

 (a) registered and

 (b) unregistered;

 (vi) construction;

 (vii) electricity, gas and water supply.

 3. Transport, Communication and Trade:

 (viii) transport, storage and communication, subdivided into

 (a) railways,

 (b) transport by other means and storage,

 (c) communication;

 (ix) trade and hotels and restaurants;

 4. Finance and Real Estate:

 (x) banking and insurance;

 (xi) real estate and ownership of dwelling and business services;

 5. Community and Personal Services:

 (xii) public administration and defence; and

 (xiii) other services.

 The combination of methods used, the type of data collected, and the
nature of the sectoring of the economy conform to the realities of the
stage of development of the Indian economy. Even when a mixed
method of obtaining net output figures is employed, the estimates so
made are quite in accord with the definition of national income, and its
 various components. We can say that with the advancement of the
economy; the quality of the estimates will further improve.

 National income of a country is calculated by Net National Product

at factor cost

 Net national product(factor cost)= national income = net

national product(market cost) - indirect taxes + subsidies

 However this formula is used for calculation mostly by developed

countries and is popular at international practice.

 In case of India national income was calculated at factor cost till 2015,
afterwards January 2015, the CSO has switched over to calculate it at
market cost(NNP at market cost).

 The market cost is calculated by adding the product taxes(indirect taxes

levied by union and state govt.) to the factor cost.

 Internationally some countries are wealthy, some countries are not

wealthy and some countries are in-between. Under such circumstances,
it would be difficult to evaluate the performance of an economy.
Performance of an economy is directly proportionate to the amount of
goods and services produced in an economy. Measuring national income
is also important to chalk out the future course of the economy. It also
broadly indicates people’s standard of living.

 Income can be measured by Gross National Product (GNP), Gross

Domestic Product (GDP), Gross National Income (GNI), Net National
Product (NNP) and Net National Income (NNI).

 In India the Central Statistical Organization has been formulating

national income.

 Internationally some countries are wealthy, some countries are not

wealthy and some countries are in-between. Under such circumstances,
it would be difficult to evaluate the performance of an economy.
Performance of an economy is directly proportionate to the amount of
goods and services produced in an economy. Measuring national income
is also important to chalk out the future course of the economy. It also
broadly indicates people’s standard of living.
 Income can be measured by Gross National Product (GNP), Gross
Domestic Product (GDP), Gross National Income (GNI), Net National
Product (NNP) and Net National Income (NNI).

 In India the Central Statistical Organization has been formulating

national income.