National Income Accounting

National Income Accounting : 

Adarsh.R National Income Accounting

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Measuring the Production, Income, and Spending of Nations

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National Income Accounts: National Income Accounting represents the tools and methods by which economists and policy-makers measure economic activity and economic growth over time. It measures the total value of the goods and services(output) produced by an economy over a period of time (normally a year).It is also a measure of the income flown from production, and/or the sum total of all spending involved for the production of output.

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Standard Measures of Income and Output: Gross National Product (GNP) Gross Domestic Product (GDP) Gross National Income (GNI) Net National Product (NNP) Net Domestic Product (NDP) Net National Income (NNI) Per Capita Income (PI) Personal Disposable Income (PDI) In India, the Central Statistical Organization (CSO) has been estimating the National Income

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GNP : the total value of output (goods and services) produced and income received in a year by domestic residence of a country - Includes the profits earned from capital invested abroad GDP : the total value of output (goods and services) produced by the factors of production located with in the country’s boundary in a year - Factors of production (labor, capital, land) may be owned by any one (citizens or foreigners) GNP - Net income earned from abroad = GDP

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NNP :decline in capital assets(plant & machinery) due to wear and tear is measured as ‘capital depreciation’ NNP = GNP – Depreciation Depreciation is usually 11% NNP = 89% of GNP NDP : same as above, depreciation on GDP. NDP = GNP – Depreciation NNI : NNP – Indirect taxes that Business pay Indirect taxes that Business pay nearly 10% NNI is nearly 90% of NNP

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Per Capita Income (National Income per person) : an indicator to show the living standards of the people of the country. PI is the total income received – whether it is earned or unearned – by the households of the economy before the payment of personal taxes. PI = NNI – (Retained earnings, corporate taxes and interest on public debt) PDI = PI – Personal taxes limitations : GNP is not considering the poverty, literacy, public health, gender equality etc.

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Needs for the study of National Income : To measure the size of the economy and level of country’s economic performance To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other countries To know the structure and composition of the national income in terms of various sectors and the periodical variations in them To make projection about the future development trend of the economy

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Needs… To help Govt. to formulate suitable development plans and policies to increase growth rates. To fix various development targets for different sectors of economy on the basis of there performance. To help business firms in forecasting future demand for there products 8. To make international comparison of people’s living standards.

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Measuring National Income Supply of Factors of Production (Land, Labour, Capital & Organization) Payment for Commodities Supply of Commodities Payment for Factor Services (Rent, Wages, Interest and Profit) (Goods & Services) (Commodity Price) Firms / Producers Households / Consumers Public Business money flow real flow Circular Flow of Income

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Circular Flow …

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Income (Y) received is equal to the consumption expenditure (C) made by the consumer Y = C Other Components on national income Savings or Investments (I) Public expenditure by Govt. (G) Expenditure on net exports (X-IM) Y = C + I + G + (X–IM) Circular Flow …

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Methods of calculating National Income There are three approaches to the measurement of national income: Spending or Expenditure Method Income Method Production or Output Method Income = Expenditure = Output Y = E = O Why output = expenditure Unsold output goes into inventory, and is counted as “inventory investment”… ….whether the inventory buildup was intentional or not. In effect, we are assuming that firms purchase their unsold output.

Spending or Expenditure Approach : 

Spending or Expenditure Approach The spending approach divides GDP into four areas: Households (Consumption expenditures) (C) Businesses (Domestic Investment) (I) Government (Govt. expenditures) (G) and Foreigners (Export (X) and Imports (IM)of Goods and Services) (X-IM). GDP = E = C + I + G + (X–IM) where E is aggregate expenditure

The Income Approach : 

The Income Approach The measure of GDP are calculated by adding all the income earned by various factors of production which are engaged in the production of output. In addition to aggregate income, national income and personal income are also used as measures of income. It includes… Wages and salaries Farm income Rent Sales taxes Depreciation (the amount of capital that has worn out during the year)

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Income Approach… Proprietors income /Income of self employed (the profits of partnerships and solely owned businesses, like a family restaurant) Interest (only the interest payments made by business firms are included and the interest payments made by government are excluded). Corporate profits which are subdivided into Corporate income taxes Dividends Undistributed corporate profits

The Production Approach : 

The Production Approach The measures of GDP are Calculated by adding the total value of the output (of goods and Service) produced by all activities during any time period, such as a year. The production approach looks at GDP from the standpoint of value added by each input in the production process. major challenge – problem of double counting Out put of many business = input of some other Eg : Out put of tyre industry is the input of bike industry… counting the out put of both industries will result in double….

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Real vs. Nominal GDP GDP is the value of all final goods and services produced domestically. Nominal GDP measures these values using current prices Real GDP measure these values using the prices of a base year.

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GDP Deflator While real GDP captures living standard, cost of living is measured by general price level. One measure of the general price level is the GDP Deflator, defined as GDP deflator = 100 * Nominal GDP/Real GDP

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Calculation Overview Simple Economy…..No Govt…no foreign trade C=consumption I=investment S=saving Y= Income Output produced=output sold i.e, Y = C + I ………….(1) Introducing Govt. in the above identity G = Govt. purchases of goods and services TA = all taxes TR = transfers to private sector (including interest) NX = net exports (exports-imports) YD = disposable income Y = C + I + G + NX……….(2) YD = Y + TR – TA ………..(3) YD = C + S …..……………(4)

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Calculation…. C = YD – S = Y + TR – TA – S ……………..(5) Consumption is disposable income less saving Or consumption is equal to income plus transfers less taxes and saving Using RHS of (5) in (2) : Y = ( Y + TR – TA – S ) + I + G + NX S – I = (TR – TA + G ) + NX ……………(6) Govt. budget deficit, i.e., Excess of private saving over investment = total govt. expenditure consisting of govt. purchases of goods and services(G) + Govt. transfer payments (TR) + net exports – amount of taxes (TA) received by govt.

Problems in calculating National Income : 

Problems in calculating National Income Black Money : It has created a parallel economy - unreported economy which is equivalent to the size of officially estimated size of the economy Non-Monetization : In most of the rural economy, considerable portion of transactions occurs informally Growing Service Sector : growing faster than Agricultural and Industrial sectors… value addition in legal consultancy, health service ,financial and business services is not based on accurate reporting.

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Problems… House Hold Services : It ignores domestic work and house keeping services Social Services : It ignores volunteer and unpaid social services. (Mother Teresa’s social service) Environment Cost : It does not distinguish between environmental-friendly and environmental-hazardous industries … cost of polluting industries is not included in the estimate.

National Income series in India : 

National Income series in India National Accounting system was initiated in the mid-sixties Indian System of National Accounting statistics follows the UN system of national accounts (1968) Based on the National Income Committee’s recommendation(1954), the Central Statistical Organization(CSO) has been estimating the NI The CSO revised its national accounting series by shifting the base year to 1970-71 … again to 1980 – 81 and then to 1993-94.. recently by improving the database and extended coverage the base year shifted to 1999-2000

Trends in national Income : 

Trends in national Income Growth of National Income in India (in percentage)

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Sectoral Composition on National Income

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International comparison of National income (2009)

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Thank You Ref. Websites Government of India, Ministry of Statistics http://mospi.gov.in/ or http://www.mospi.nic.in/ Central Intelligence Agency (CIA) https://www.cia.gov/library/publications/the-world-factbook/geos/in.html Wikipedia http://en.wikipedia.org/wiki/Gross_domestic_product India In Business http://www.indiainbusiness.nic.in