1. National Income Accounting
Unit I
PPT 2
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2. Introduction
• It is necessary to measure the total output
and income generated in an
economy….why?
• Because only then we can make out that
whether the economy is growing or not!
• A increase in real GNP ( a measure of
total output in the economy) indicates
economic growth.
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3. Basic Concepts
• GNP ( Gross National Product) at market prices:
Is defined as the aggregate of market value of
final goods & services produced by an economy
within a period of one year
• Market value: means the price at which it is sold
in the market
• Final goods: those goods that are not going
through any further value addition and are sold
as such in the market.
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4. GNP..
• Whereas intermediate goods are those
which are used for resale or for further
processing. E.g Cotton is an intermediate
good while shirt made with this cotton is a
final good, fertilizer & wheat?...any
guesses?
• Non productive transactions must be
excluded from calculation of GNP.
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5. GNP
• Non productive transactions are those financial
transactions corresponding to which any productive
activity is not taking place and in these transactions,
money only exchanges hands e.g sale & purchase of
shares & stocks, gifts, old age pensions, unemployment
allowances etc.
• GNP is usually calculated for a period of one year.
• It is a sum total of all goods & services produced by
citizens of an economy, whether within the boundaries of
that country or outside. E.g the incomes earned by
Indian nationals while working abroad will be included in
the calculation of GNP.
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6. GDP
• It is defined as the market value of
aggregate goods & services produced
within the boundaries of a country during a
period of one year.
• GNP at mp – (Net exports or net factor
income from abroad) = GDP at mp.
• Net Exports = Exports – Imports
• Exports means sale of domestically
produced products outside the economy.
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7. GDP
• On the other hand, Imports are produced
outside but sold within the boundaries of a
country.
• If what we receive from abroad is greater
than what we pay abroad , then GNP >
GDP
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8. NNP at market prices
• NNP at mp = GNP at mp – Depreciation
• Depreciation refers to the wear & tear of
capital assets.
• In National Income Accounting,
depreciation is usually referred to as
Capital Consumption Allowance ( CCA)
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9. NNP at factor Cost or National Income (NY or NI or Y)
• National Income at factor cost is the
aggregate of all incomes earned by the
factors of production for their contribution
of land, labor, capital & entrepreneurial
ability which go into the year’s net
production.
• It is the income that all the factors of
production receive for their services
rendered during the year.
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10. NNP at factor cost or National Income (NY or NI or Y)
• NNP fc = NNP mp – Indirect taxes + Subsidies
• NNP mp is the market value of G&S. However,
the whole of this market value does not get
transferred to FOP in the form of incomes.
• Indirect taxes, which form a part of the market
value of G&S gets transferred from the seller to
the Govt. and therefore does not form a part of
the factor incomes.
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11. NNP at factor cost or National Income (NY or NI or Y)
• Subsidies have to be added to NNP mp
because it is a price which the Govt. pays
to the manufacturer to keep the prices low
for consumers.
• Therefore, it forms a part of factor incomes
as it is transferred by manufacturer to the
FOP
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12. Personal Income
• It is the income that is received by the
individuals , whether earned or un earned.
• So, from the NY, we subs tract those
incomes which are not received by them.
• PI = NY – ( corporate taxes + Corporate
retained earnings/undistributed corporate
profits + social security contributions)+
transfer payments
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13. Personal Income
• Transfer Payments : These are payments
received by individuals for which they do
not have to provide any productive service
in return e.g pensions, scholarships,
unemployment allowances etc.
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14. Disposable Income or Personal
Disposable Income
• It is the income which is received by the
individuals & is at their disposal for
spending.
• PDI = PI – direct taxes
• Direct taxes have to be paid compulsorily
by individuals, only the residual income
can be spent by them.
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15. Discretionary Income
• It is defined as the income which the
individuals can spend at their own
discretion, i.e at their free will.
• DI = Disposable income – compulsory
savings & loan installments.
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16. Per Capita Income
• It is defined as the average earnings or
income of an individual in a particular
country in a year.
• Per capita income = National Income (2010)
Population in 2010
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17. Private Income
• It is the income obtained by individuals
from any source, and the retained income
of corporations.
• Private income = NNP f c + TP + interest
on public debt + corporate retained
earnings + savings of Govt. undertakings.
• OR
• Private Income = PI + corporate taxes+
corporate retained earnings
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18. Nominal & Real National Income
• National Income or product calculated at
current prices is called Nominal Income.
• It is the money value of all final G&S
measured at current prices produced by a
country during one year.
• However, if there is inflation, the nominal
value of national income will increase
even if there is no actual growth in the
output or income.
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19. Nominal & Real National Income
• So, during inflation the nominal value of NI
will be increasing even when there is no
real increase in the output.
• To overcome this discrepancy and to
make the NI data comparable over time,
we calculate NI or GDP or GNP at
constant prices.
• NI at constant prices or at base year’s
prices is known as Real National Income
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20. Nominal & Real National Income
• To calculate NI at constant prices ,we
chose a base year, which is taken as a
benchmark against which all prices are
compared.
• For e.g if we want to compare GNP of
2010 with GNP of 2004, we will calculate
GNP of 2010 at 2004’s prices. In this case
2004 will be the base year!
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21. Nominal & Real National Income
• The formula to convert the NI at current
prices to the constant prices ( of the base
year) is as follows:
NI at constant prices =NI at current prices * 100
Price Index for current year
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22. GDP Deflator
• The GDP deflator is
calculated as follows:
Nominal GDP
GDP deflator = × 100
Real GDP
In GDP deflator, we compare the base year price index with
current year price index.
So, GDP of constant prices = Nominal GDP
GDP deflator
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23. Calculating NI at Constant prices
(Question) NY at current Price Index NY at
Year prices No. (base constant
year 2006 = prices
100)
2006 500 100 500
2007 525 105 ?
2008 570 112 ?
2009 610 120 ?
2010
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680 130 ?
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24. Answers to Question
2007 500
2008 508.93
2009 508.33
2010 523.08
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25. Methods to Measure National
Income
• Different measurements of national
income viz., GNP, GDP, NNP or NY can
be calculated with three different methods,
which are:
• Expenditure or Spending method
• Income method
• Production method
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26. Spending Approach
• The spending approach divides GDP into
four areas:
• households (consumption) (C)
• businesses (investment) (I)
• government (G) and
• foreigners (net exports) (X-IM).
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27. Spending Approach
• Therefore, GNP = C + I + G + ( X- M)
• C stands for Private Consumption expenditure. It
is the expenditure on consumer durable goods &
single use goods.
• I stands for Investment expenditure or “Gross
Domestic Private Investment”. It is the
expenditure made by private enterprises on new
investment & replacement of old capital. There
are two components to it – (i) Fixed investment,
(ii) Change in inventories.
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28. Spending Method
• G refers to the expenditure that the Govt.
incurs on purchase of goods & services.
• X-M is the net exports or the export
surplus
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29. Income Method
• GNP = Wages & salaries + Rent +
Interest+ Dividends + Undistributed
corporate profits + Mixed Incomes +Net
income from abroad
• Mixed Incomes or Composite Income
means a combination of any of the above
incomes.
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30. Mixed Incomes
• EXAMPLE :
• A small grocer has set up his grocery shop
in one portion of his house & has put his
own money as capital. He & his family
members work in the same house. In this
case, the total income recd by that grocer
consists of rent, wages, interest & profit.
Such types of income are known as Mixed
Incomes
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31. The production approach
• The production approach looks at GDP
from the standpoint of value added by
each input in the production process.
• The three approaches--spending, income,
and production– (should) result in
equivalent values for GDP.
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32. Production Approach / Value Added
• While taking the aggregate value of output
of G &S for the whole economy, we must
avoid “Double Counting”.
• It can be avoided by taking the value
addition for each stage of production or by
taking the final G&S produced.
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33. Value Addition Method
Stage of Prod. Final Value Value Added
Sale of Wheat 100 100
Sale of flour 150
Sale of Bread 300 150
Sale by 350
Wholeseller
Sale by retailer 400
Bread sold at Rs. ? ?
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34. Question 1
• GNP = C+I+G+(X-M)
= (1150 – 155) +150+25+125+(-20)
= 1275
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35. Question 2
• GNP mp = C+I+G+(X-M)
= 50,000+5000+4500+500+(800 – 600)
= 60,200
GNP mp = GDP mp + NFIA
60200 = GDP + 500 = 60,700
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36. Problems in calculation of National
Income
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