INTRODUCTION
When we
undertake the study of national economies, we
are interested in macroeconomic aggregates such
as, aggregate income, output, employment,
prices, consumption, savings, investment
etc. Just as there are accounting conventions which measure
the performance of business, there
are conventions for measuring and analyzing the economic performance of a nation.
National Income Accounting, pioneered by the Nobel prize-winning economists Simon
Kuznets and Richard Stone, is
one such measure.
National Income is defined as the net value of all
economic goods and services produced within
the domestic territory of a country in an accounting year plus the net factor
income from abroad. According
to the Central Statistical Organisation
(CSO) ‘National income is the sum total
of factor incomes generated by the normal residents of a country in the form of wages, rent , interest and
profit in an accounting year’.
USEFULNESS AND SIGNIFICANCE OF NATIONAL INCOME ESTIMATES
National income
accounts are fundamental aggregate statistics in macroeconomic analysis and are
extremely useful, especially for the emerging and transition economies.
1.National income
accounts provide a comprehensive, conceptual and
accounting framework for analyzing
and evaluating the short-run
performance of an economy. The level of national income indicates
the level of economic
1. 2.The distribution pattern of national income determines the
pattern of demand for goods and
services and enables businesses to
forecast the future demand for their products.
3.Economic welfare
depends to a considerable degree on the
magnitude and distribution of national
income, size of per capital income and the growth of these over time.
4.The estimates of
national income show the composition
and structure of national income in terms of different sectors of the economy, the
periodical variations in them and the
broad sectoral shifts in an economy over time. It is also possible to make temporal and spatial comparisons
of the trend and speed of economic progress and development. Using
these information, the governments can fix various sector-specific development targets for different sectors of the economy and formulate suitable development plans and policies to increase growth rates.
5. National income
statistics also provide a quantitative basis
for macroeconomic modeling and analysis, for assessing and choosing economic policies
and for objective statement as well
as evaluation of governments’ economic
policies. These figures often influence
popular and political judgments
about the relative success
of economic programmes.
6.National income
estimates throw light on income distribution and the possible inequality in the distribution among
different categories of income
earners. It is also possible make comparisons of structural
statistics, such as ratios of investment, taxes, or government expenditures to GDP.
7.International comparisons
in respect of incomes and living
standards assist in determining eligibility
for loans, and or other funds or conditions on which such loans, and/
or funds are made available. The
national income data
are also useful to determine
the share of nation’s contributions
to various international bodies.
8.Combined with financial
and monetary data, national income
data provide a guide to make policies for
growth and inflation.
9. National income
or a relevant component of it is an indispensable variable considered in economic forecasting and to make projections about the future development trends of the economy.
DIFFERENT CONCEPTS OF NATIONAL INCOME
The basic concepts and definitions of the terms used in national accounts largely follow
those given in the UN System of
National Accounts (SNA) developed by
United Nations to provide a
comprehensive conceptual and accounting framework for compiling and
reporting macroeconomic statistics
for analysing and evaluating the performance of an economy.
Each of these concepts has a specific meaning, use and method of measurement.
National income accounts have three sides:
a product side, an expenditure side and an income side. The product side measures production based on concept of value added. The expenditure side looks at the final sales of goods and services. Whereas the income side
measures the distribution of the proceeds from
sales to different factors of production. Accordingly, national income is a measure of the total flow of ‘earnings
of the factor-owners’ which
they receive through the production of
goods and services. Thus, national income is the sum total of all the incomes accruing over a
specified period to the residents of a country and consists of wages, salaries,
profits, rent and interest.
On the
product side there are two widely reported measures of overall production
namely, Gross Domestic Product (GDP) and Gross National Product (GNP).
Gross Domestic Product (GDP MP)
Gross domestic product (GDP) is a measure
of the market value of all final economic
goods and services, gross of depreciation,
produced within the domestic territory
of a country during a given
time period. It is the sum total of
‘value added’ by all producing units in the domestic territory and includes value added by current
production by foreign residents or foreign-owned
firms. The term ‘gross’ implies
that GDP is measured ‘gross’ of depreciation.
‘Domestic’ means domestic territory or resident production units. However,
GDP excludes transfer payments, financial
transactions and non- reported output
generated through illegal
transactions such as narcotics
and gambling (these are also known as
‘bads’ as opposed to goods which GDP accounts
for).
GDPMP = Value of Output in the Domestic Territory – Value of Intermediate Consumption
GDP MP = ∑ Value
Added
While learning about national
income, there are a few important points which one needs to bear in mind:
( (i) The value of only final
goods and services or only the value added
by the production process would
be included in GDP. By ‘value added’ we
mean the difference between value of output
and purchase of intermediate goods.
Value added represents the contribution
of labour and capital to the production process.
(ii) Intermediate consumption
consists of the value of the goods
and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption
of fixed capital. Intermediate goods used to produce other goods rather than
being sold to final purchasers are not counted as it would involve double
counting. The intermediate goods or
services may be either transformed or used
up by the production process. For
example, the value of flour used in
making bread would not be counted as it will be included while bread is counted. This is because flour is an
intermediate good in bread
making process. Similarly, if we
include the value of an automobile in GDP, we should not be including the value of the tyres separately.
( (iii) Gross Domestic
Product (GDP) is a measure of
production activity. GDP covers all
production activities recognized by SNA
called the ‘production boundary’. The
production boundary covers production
of almost all goods and services classified in the National
Industrial Classification (NIC). Production of agriculture, forestry and fishing
which are used for own consumption of
producers is also included in the production boundary. Thus, Gross Domestic Product (GDP) of any nation
represents the sum total of
gross value added (GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of that economy
during the said year.
( (iv) Economic activities,
as distinguished from non-economic activities, include all human activities which create goods and services that are exchanged in a
(v)National income
is a ‘flow’ measure of output per
time period—for example, per year—and includes only those goods
and services produced in the current period i.e. produced during the time interval under consideration. The value of market
transactions such as exchange of goods which already exist or are previously produced, do not enter into the calculation of national income. Therefore, the value of assets
such as stocks and bonds which
are exchanged during the pertinent period are not included in national
income as these do not directly involve current production of goods and services. However, the value of services that accompany the sale and
purchase (e.g. fees paid to real estate agents and lawyers) represent current production and, therefore, is
included in national income.
(vi) An important point to
remember is that two types of goods used in the production process are counted in GDP namely, capital goods (business
plant and equipment purchases) and inventory
investment—the net change in inventories
of final goods awaiting sale or of materials used in
the production which may be positive or
negative. Additions to inventory stocks of final goods and materials belong
to GDP because they are currently produced output.
The national
income in real terms when available by industry of origin, give a measure of the structural changes in the pattern of production in the country which is vital for economic analysis.
1. Nominal
GDP vs Real
GDP: GDP at Current and Constant
prices
Since we measure the value of output
in terms of market prices,
GDP, which is essentially a quantity
measure, is sensitive to changes
in the
average price level. The same physical output will correspond to a different GDP level if the average level of market
prices changes. That is, if
prices rise, GDP measured at market
prices will also rise without any real increase
in physical output. This is
misleading because it does not reflect the changes in the actual volume of output. To correct this i.e. to eliminate
the effect of prices, in addition to computing GDP in terms of current market prices, termed ‘nominal GDP’ or ‘GDP at current prices’,
the national income accountants also calculate ‘real GDP ’or
‘GDP at constant prices’ which is the
value
of domestic
product in terms of constant
prices of a chosen base year. Real GDP
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