National Income Accounting

What is national accounting?

National income accounting refers to the set of methods and principles that are used by the government for measuring production and income, or in other words economic activity of a country in a given time period.

The various measures of determining national income are GDP (Gross Domestic Product), GNP (Gross National Product), and NNP (Net National Product) along with other measures such as personal income and disposable income.

Table of Content :

GDPGNPNNPFunctions

The importance of national income accounting is that it is helpful in facilitating techniques and procedures for measurement of output and income at the aggregate level. It is a process of preparing national income accounts that is based on the principles of double entry system of business accounting.

National income accounting helps in summarising the economic performance of a country by measuring the national income aggregates for the year.

The government policies are framed on the basis of the data obtained from national income accounting.

What is the national income accounting equation?

National income accounting equation is an equation that shows the relationship between income and expense of an economy and other categories. It is represented by the following equation:

Y = C + I + G + (X – M)

Where

Y = National income

C = Personal consumption expenditure

I = Private investment

G = Government spending

X = Net exports

M = Imports

The most important metrics that are determined by national income accounting are GDP, GNP, NNP, disposable income, and personal income. Let us know more about these concepts briefly in the following lines.

Gross Domestic Product (GDP)

The most important metric that is determined by national income accounting is GDP or the gross domestic product. GDP is defined as the total monetary or the market value of all the final goods and services that are produced within the geographical boundaries of a country.

GDP works as a scorecard that reflects the economic health of a country. It is calculated on an annual basis. GDP helps in estimating the growth rate of a country. GDP can be calculated using the three methods, which are expenditures method, production method, and income method.

The other indicators of national income are derived from GDP.

GDP can be calculated by the following two methods:

1. Expenditure approach
2. Income approach

Calculation of GDP by expenditure approach is,

GDP = C + I + G + (X – M)

Where

GDP = Gross domestic product

C = Personal consumption expenditure

I = Private investment

G = Government spending

X = Net exports

M = Imports

Income approach calculation

GDP = Private consumption + Gross investment + Government investment + Government spending + (Exports – Imports)

Gross National Product (GNP)

Gross national product or GNP is a measure of the total value of all the finished goods and services that is produced by the citizens of a country irrespective of their geographic location. It calculates only the final or finished goods.

It signifies how much the citizens of a country are contributing to the economy. It does not include income earned by foreign nationals within the country.

GNP is calculated using the following formulae:

GNP = C + I + G + X + Z

Where

C = Consumption

I = Investment

G = Government

X = Net exports

Z = Net factor income from abroad

Net National Product (NNP)

Net national product or NNP is the total value of all goods and services that are produced in a country during a given period of time minus the depreciation. It is represented as follows:

NNP = GNP – Depreciation

Methods of National Income Accounting

There are three methods of measuring national income. They are as follows:

1. Product method: In this method, a country’s national income can be calculated by adding the output of all the firms in the economy to determine the nation’s output.
2. Income method: This method is used to calculate incomes generated by production. It includes income from employment, rent obtained for buildings, patents, and copyrights, return on capital from the private sector and public sector, depreciation, etc.
3. Expenditure method: In this method, the national income is calculated by adding all the expenditures that are done for purchasing the national output.

Functions of National Income Accounting

The basic functions of national income accounting are as follows:

1. To determine the economic status of a country.
2. To provide a basis of evaluation and reviewing of policies that are under implementation.

Uses of National Income Accounting

Uses of national income accounting are as follows:

1. It reflects the economic performance of an economy and shows its strengths and weaknesses.
2. It helps to determine the structural changes that are appearing in the economy.
3. It helps in comparing nations based on national income.
4. It shows the contribution of each sector towards the growth of the economy.

This article helps the students in getting a better understanding of the concept of national income accounting. For more such interesting concepts, stay tuned to BYJU’S.