Note on National Income Accounting

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Meaning of National Income

National income is the sum of income earned by all the individuals of a country within the specific time period, generally within a year. The sum of individual income or various incomes from all the final goods and services produced in a country within a year is called national income.

Symbolically: NI = Y1 + Y2 + Y3 + .... + Yn

YI = Individual income of first person

Y2 = Individual income of second person and so on.

 

Following Economist gave appropriate and clear definition of National Income:

1. Alfred Marshall:

According to Alfred Marshall, “ The labour and capital of country acting on its natural resources produce annually a certain net aggregate of commodities, material & immaterial including service of all kinds.”

          In this way, Marshall's definition of national income is basically related with production site.  

2. A.C. Pigou:

According to A.C. Pigou, ”National Income is that part of income of the country including net income from abroad that can be expressed in monertary value.”

          Pigou’s definition is also related with production site but following two points are significant in peoples’s definition

  • Net foreign Income from abroad is also included in National Income.
  • Only that income is counted as National Income which can be measured in Monetary Value.

 

3. Irving Fisher:

 According to Srving Fisher, “ National Income is that part of income of the country which is finally consumed by the people of the country.” In this way fisher’s definition is related with consumption site.

4. Simon Kuznets:

According to Modern economist, Simon Kuznets, “ National Income is the circular flow of income and expenditure which is flowing in productive system of the economy in particular period of time.

Different Concept of National Income

The various concepts associated with national income are as follows:

1. Gross Domestic Product(GDP)

Gross means total, domestic means home and product means output. So, GDP is the total market value of all currently produced final goods and services within the geographical boundary of a country in a specific time period generally in a year. GDP includes the points below:

  • GDP is the market value of goods and services.
  • GDP excludes the home product, households, etc.
  • GDP includes only currently produced goods and services.
  • GDP does not include previous year production.
  • GDP includes only final goods and devices.
  • GDP excludes intermediate goods (Raw materials)
  • GDP includes the good produced within the country, whether they are produced by domestic people or foreigners, it is included.
  • GDP excludes the transfer payments like pensions.
  • They don’t contribute to current production.

GDP can be calculated by total quantity of production of different goods multiplying by per unit price of different goods. Suppose an economy is producing Q1, Q2, Q3 .... types of final goods and services whose respective prices are P1, P2, P3 .... then GDP is given by:

GDP = P1Q1 + P2Q2 + P3Q3 + .... + PnQn

According to expenditure approach, the GDP is given by:

GDP = C + I + G + (X - M)

where,

C = Consumption expenditure

I = Investment expenditure

G = Government expenditure

(X - M) = Net Profit

X = Export

I = Import

While calculating GDP, the total quantity of final goods and services produced during that year within a domestic territory of a country are multiplied by market price.

Features of GDP

  • GDP is the money value of final goods and services which is produced only with in certain geographical territory of the country.
  • Foreign Income derived from foreign sector are excluded in GDP.
  • GDP can be measured in current market price
  • Only that production can be taken as GDP which can be expressed in Money.
  • Transfer Payment like different type of allowences cannot be included in GDP.
  • It includes the income earned by both residents and foreigners in domestic territory.
  • GDP is calculated in Gross Term i.e. without deducting depreciation.

2. Gross National Product(GNP)

 

GNP (quotesgram.com)
(Source: quotesgram.com)

GNP is the total market value of all currently produced final goods and services within the boundary of the country in a year as well as net factor income abroad (NFIA) during one year period of time. NFIA is the difference between what domestic people earn from abroad and what foreign people earn from the domestic economy.

Symbolically,

GNP = C + I + G + (X - M) + NFIA

or, 

GNP = GDP + NFIA

Where,

GDP = Gross Domestic Product

C = Consumption Expenditure

I = Investment Expenditure 

G = Government Expenditure

X-M = Net Profit

X = Export

M = Import

NFIA = Net Factor Income Aborad

While calculating GNP, the final goods and services that are produced during a particular year are included because GNP is the measure of the economy's production during a given time period.

Features of GNP

 

  • GNP is measured in current market price.
  • Transfer payment and capital gains cannot be included in GNP.
  • Net foreign income from abroad are also included in GNP.
  • GNP includes the income earned only by the residents of a country with in a country and abroad.
  • GNP is calculated in gross terms.
  • The intermediate goods are excluded to avoid double counting.
  • GNP is measured in only monetary term.
  • It includes the money value of only final product.

3. Net National Product(NNP)

The physical capitals like machinery items get wear and tear in the process of production. So, there is fall in the price of such goods which is called depreciation. When we deduct the value of depreciation from GNP, we get NNP. NNO is the market value of all final goods after deducting the depreciation on it.

NNP =GNP - Depreciation

 4. National Income(NI)

 According to this concept, NI is measured from distributation site. It is clear that NI is distributed among the factors in the form of rent, wages interest & profit. Therefore, NI is calculated by adding the contribution of factor rewards. 

                    According to another approach, NI is calculated by government sudsidy in NNP & deducting indirect tax of NNP. It is expressed as following form:

NI = NNP + Government Subsidy - Indirect tax

Or,

NI = Sum of factor reward (R+W+I+π) + NFIA

Where, 

NI = National Income, I = Interest, R = Rent, π = Profit, W = Wages, NFIA = Net factor income earned from abroad. 

5. Personal Income(PI)

The total amount of money income received by the individuals and the households of a country from all possible sources, before paying tax is called Personal Income (PI). An individual or a household earns income from wages and salary, rent, interest, shares, etc. Thus PI is expressed as:

PI = National Income - corporate income tax - undistributed corporate profit - social security contribution + transfer payments

6. Disposable Income(DI)

Income received by an individual after paying personal tax is called disposable income. It is a pure or net income of a person which is gained only after paying tax. Therefore, he/she  can spend such income in any sector according to her/his choice. DI is expressed as:

DI = Personal Income - Personal Tax

Source: study.com
Source: study.com

Out of disposal income, the individual may save some part from the income for future security and spend some certain amount on consumption. Therefore, DI can be expressed as:

DI = C + S

Where,

DI = Disposal Income

C = Consumption expenditure

S = Saving

7. Per- Capita Income(PCI)

Source: www.tradingeconomics.com
Source: www.tradingeconomics.com

The average income of the individuals of a country in any year is called PCI. It is calculated by total National income of a country in particular year dividing by total number of income of that country in particular year.

Symbolically,

PCI=\(\frac{Total \:National\:Income\:of\:a\:Country\:in\:the\:year}{ Total\:Number\:of\:population\:of\:a\:Country\:in\:the\:year }\)

 

Concept of Nominal GDP & Real GDP   

1. Nominal GDP:

The gross domestic product which is measured in current market price is called Nominal GDP. It increases with increase in price. Total volume of Nominal GDP may be higher only due to change in price not production. Therefore, nominal GDP doesn’t represent actual economic growth. Nominal GDP is calculated by total production of current year multiplying by respective price of the year. Symbollically, it is expressed as;

GDP = P1Q1+P2Q2+P3Q3+……+PnQn

Where,

GDP=Gross Domestic Product

Q1,Q2,Q& Qn  =Quantity Production of goods in particular year.

P1,P2,P3 & Pn = Respective price in current year.

 

2. Real GDP:

The gross domestic which is measured in base year is called real GDP. It doesn’t change with the change with change in price. It changes only due to change is output. Real GDP measures actual economic growth.

            Real GDP is calculated by total volume of production of current year multiplying by price of base year. It is expressed in following form:

GDP = Q1P0+Q2P0+Q3P0+…….+QnP0

Where,
GDP= Gross Domestic Product

Q1 ,Q2 ,Q3 & Qn = Total Quantity of Production on a year.

P0 = Base year price or constant price.

 

GDP Deflator

It is the relative change in the price of current year in compation to the level of price in base year. In other words, it is the ratio of nominal GDP. In the given year to real GDP multiplied by hundred.           

                        GDP Deflator shows real rate of inflation & increase in GDP between two different period of time. It is calculated by using following formula:

GDP Deflator =\(\frac{Nominal\:GDP}{ Real\:GDP }\) x 100

Real GDP =\(\frac{Nominal\:GDP}{ GDP\: Deflator }\) x 100

Nominal GDP = \(\frac{ Real\:GDP\:X\:GDP\:Deflator }{ 100}\)

 

Difference between

i. GDP and GNP

 

                                  GDP 

 

                                GNP

   1

  Money value of final goods & services produced within territory of    a country during one year period of time.

   1

 Money value of final goods and services produced within territory   as well as net factor income from abroad.

   2

  It doesn’t includes net factor income from abroad.

   2

 It does includes net factor income from abroad.

   3

  It is narrow concept which doesn’t cross national boundry.

   3

 It is broad concept which also crosses national boundry.

   4

  It includes the income earned by residents of a country & foreigners in domestic territory.

   4

 It includes the income earned by residents of a country within a   country and abroad.

   5

The algebraic form of GDP is: GDP=Q1P1+Q2P2+Q3P3……+QnPn

GDP= C+J+G+(X-M)

   5

 

The algebraic form of GNP is: GNP=Q1P1+Q2P2+Q3P3……+QnPn+NFIA

GNP= C+J+G+(X-M)+NFIA

 

 

 

 

ii. Nominal & Real GDP

 

Nominal GDP

 

Real GDP

1

Nominal GDP is measured in current market price or in the price of current year.

1

Real GDP is measured in constant market price in

2

Nominal GDP change with the change in market price.

2

Real GDP change with the change in price.

3

Total volume of GDP may be higher only due to change in price not production.

3

Total volume of GDP increases only due to change in production.

4

Nominal GDP doesn’t represent real economic growth of a country.

4

Real GDP represents real economic growth of a country.

5

The algebraic form of Nominal GDP is:

GDP=Q1P1+Q2P2+….+QnPn

5

The algebraic form of Real GDP is:

GDP=Q1P0+Q2P0+….+QnP0

 

 

 

 

 

Reference:

Adhikari, Ramesh Prasad, Economics-XI, Asmita Pustak Prakashan, Kathmandu

Kanel, Navaraj et.al., Principles of Economics-XI, Buddha Prakashan, Kathmandu

Kharel, Khom Raj et.al., Economics In English Medium-XI, Sukunda Pustak Bhawan, Kathmandu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. National income is the sum of income earned by all the individual of the individuals of a country within specific time period.
  2. The individual of a nation or various incomes from different types of all the final goods and services produced in a country within a year is called national income.
  3. Gross domestic product, gross national product, net national product, personal income, disposable income and per-capita income are the concepts of national income.
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