Download National Income Accounting

National Income
Analysis
National Income- Meaning
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It is a sum total of factor incomes
accruing to normal residents of a
country within an accounting year.
The concept of National Income can
be explained from three sides –
I) Production
II) Income and
III) Expenditure
DEFINITIONS
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Central Statistical Organization: - “National
Income is the sum total of factor incomes earned
by the normal residents of a country in the form of
wages, rent, interest and profit in an accounting
year”.
Prof. Kuznets: - “The sum total of the market
value of final goods and services, produced by
normal residents of a country in one year is known
as national product.”
Circular flow diagram
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summarizes the transactions between
the different economic agents
agents: households, firms (business),
government, and foreigners (rest of
the world)
Circular flow diagram
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Assumption: The economy composed of
households and firms only
Households: own factors of production,
consume goods and service
Firms: hire factors of production to produce
goods and services
payments for goods and services
goods and services
FIRMS
HOUSEHOLDS
factor services
factor payments
(wages, interest, rent, profit)
FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between
firms and households in a simple economy.
In the upper loop, the arrow emanating from firms to households represents the sale by firms of
goods and services to households. On the other hand, the arrow from households to firms
represents the payments.
n the lower loop, the arrow originating from the households to the firms shows that firms hire
labor and capital from households in order to produce goods and services. The arrow
emanating from the firms indicates their payments for the use of the factors of production.
Revenue
(=GDP)
Good and
services sold
Spending
(=GDP)
MARKETS FOR
GOODS AND
SERVICES
Good and
services
bought
HOUSEHOLDS
FIRMS
Inputs for
Production
MARKETS FOR
FACTORS OF
PRODUCTION
Land, labor
and capital
Wages, rent,
interest and
profit (=GDP)
Income (=GDP)
Flow of goods & services
Flow of money: pesos
THE CIRCULAR FLOW DIAGRAM
Transfer payments
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Transfer payments – are transactions
wherein one party is not obliged to
deliver a good or service in return for
the payment.
Examples: retirement benefits,
unemployment benefits, scholarships,
and donations.
Concepts/Aggregates of National
Income
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Gross Domestic Product at Market Price (GDPMP)
Gross National Product at Market Price (GDPMP)
Net National Product at Market Price (NNPMP)
Net Domestic Product at Market Price (NDPMP)
Gross Domestic Product at Factor Cost (GDPFC)
Gross National Product at Factor Cost (GNPFC)
Net National Product at Factor Cost (NNPFC)
Net Domestic Product at Factor Cost (NDPFC)
Factor Income From Net Domestic Product Accruing
to Private Sector
Private Income
Personal Income
Basic Concepts Domestic and National Concepts
1.Domestic Income = National Income – NFYA
2. National Income = Domestic Income + NFYA
 Market Price and Factor Cost Concepts
1.
Market Price = Factor Cost + NIT
2.
Factor Cost = Market Price – NIT

Gross and Net Concepts
1.
Gross Product = Net Product + Depreciation
2.
Net product =
Gross Product – Depreciation

Definition of GDP
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The market value of good i (Vi) is
equal to PiQi
GDP = sum of the market values
of all final goods and services
produced within the year.
GDP 
n
n
 V  P
i1
i
i1
i
 Qi
GDP includes final goods
and services only

Final goods - goods and services that are
not purchased for the purpose of producing
other goods and services or for resale
– Eg. Rice (final) and palay or unhusked rice
(intermediate product)

Including intermediate goods and final
goods will result in “double counting”.
Approaches for measuring National
Income
1. Value-added Approach – measures GDP as
the sum of value added at each stage of
production (from initial to final stage)
2. Income Approach (lower loop) – measures
GDP as the sum of incomes of factors of
production (wages, rent, interest and
profit.
3. Expenditure Approach – measures GDP as
the sum of expenditures on final goods
and services.
Value Added Method
STEPS –
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1.
2.
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Classification of Productive Enterprises
Calculation of Value Added
Value of Output
Value of Intermediate Consumption
Calculation of Domestic Income
Calculation of National Income
Value Added Approach

Suppose that rice is the only final product of an
economy: It goes through several (3) stages of
production.
Stage of Prod’n
Value of
intermediate
good
Farmer - Palay
Value of
Sales
Value-added
12,000
12,000
Rice Miller -Milled
Rice
12,000
15,000
3,000
Retailers - Rice
15,000
20,000
5,000
GDP= Total Value
Added
20,000
Cautions Regarding Value Added
1) Value of intermediate goods is not
included in Product Method.
2) Value of second hand goods is not
included in product method.
3) Imputed rent is included in this
method.
Income Method
STEPS
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1.
2.
3.
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Classification of Productive Enterprises
Classification of Factor Income
Compensation of Employees (COE)
Operating Surplus (O.S.)
Mixed Income
Calculation of Domestic Income
Calculation of National Income
Income Approach
ITEMS
Compensation of
Employees
Operating Surplus
Depreciation
Net Indirect Taxes
Gross Domestic Product
SYMBOLS
VALUE
COE
1,093,800
OS
2,215,100
D
357,200
356,600
4,022,700
NIT
GDP
Cautions Regarding Income
Methods
 Windfall gains
 Income from illegal activities
 Transfer earnings
 The sale and purchase of second hand
goods
 Imputed value of services
Expenditure Method
STEPS
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1.
2.
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Identification and classification of
Economic Units incurring Final
Expenditure
Classification of Final Expenditure
Final Consumption Expenditure
Final Investment Expenditure
Calculation of Domestic Income
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NDPFC = Private Final Consumption
Expenditure + Government Final
Consumption Expenditure + Gross
Domestic Capital Expenditure (Gross
Fixed Capital Formation + Change in
Stock) + Net Exports (Exports –
Imports)- Dep.-NIT
Calculation of National Income
Cautions Regarding Expenditure
Method
 Only final expenditure is included in
national income.
 Expenditure on shares and bonds are
not included.
 Expenditure on second hand goods is
not included in national income.
 Expenditure on transfer payments is
not included in national income.
Nominal and Real GDP
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GDP at current prices or nominal GDP - GDP
measured using the prices of the year for which it is
calculated
Nominal GDP can be a misleading indicator of
changes in output or income because it also
embodies changes in the prices of goods and
services.
Real GDP or GDP at constant prices  measures the
total value of output using the prices of a selected
year (the base year).
Real GDP better for analysis overtime because it
eliminates the effects of price changes
Real GDP
Nominal GDP
Real GDP 
 100.
GDP deflator
Inflation Rate
CPI t  CPI t 1
Inflation Rate 
CPI t 1
GDP per capita
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Measures how much output or income was
produced or received, on the average, by an
individual in an economy
Useful for comparing the performance of a country
overtime and a country’s performance relative to its
neighbors
GDP
GDP per capita 
population
PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)
Per Capita GNI
Per Capita GNI
Poverty rate
Myanmar b
217
26.6
Nepal
250
30.9
Cambodia
350
34.7
Lao PDR
390
33.5
Bangladesh
440
49.8
Viet Nam
540
19.5
Pakistan
600
32.6
India
620
26.1
Sri Lanka
1010
22.7
Indonesia
1140
18.2
Philippines
1170
30.0
China
1500
3.1
Thailand
2490
9.8
Malaysia
4520
7.5
Korea, Rep. of
14000
3.6
Taiwan
14770
0.8
Singapore
24760
0.0
Some Limitations of GDP or
GNP as measures of growth
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Ignores income distribution
Ignores environmental degradation
Does not include activities that do not
go through the formal markets sectors
Does not include “illegal” activities like
drug trafficking, prostitution,
moonlighting