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National Income Accounting
(NIA)
Tragakes 2011, pp. 219-226
C. Bordoy
UWC Maastricht
Measuring economic activity


It involves measuring the national income
or output of an economy. Also referred to
as NIA.
Why do we want to measure national
income / value of aggregate output?
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To assess performance over time
To make comparisons with other economies
As a basis for policy making
C. Bordoy
UWC Maastricht
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In Microeconomics: quantity
In Macroeconomics: (monetary) value, as
we need to add up quantities of output of
many different goods and services.
Value = quantity x price
Level of aggregate output= aggregate
output= value of aggregate output.
C. Bordoy
UWC Maastricht

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CFM: the value of aggregate output
produced is equal to the total income
generated in producing that output, which
is equal to the expenditures made to
purchase that output.
‘National income’ and value of aggregate
output sometimes used interchangeably.
There are three ways to measure the
value of aggregate output.
C. Bordoy
UWC Maastricht
1.
Expenditure approach. Measures total
amount of spending to buy final goods
and services.

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1.
2.
Intermediate goods are not counted.
Four components:
Consumption spending (C): all purchases by
households on final g&s in a year (excludes
housing).
Investment spending (I) includes:

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Spending by firms on capital goods
Spending on new construction
Changes in inventories
C. Bordoy
UWC Maastricht
3.
Government spending (G): spending by
governments within a country (national,
regional, local).

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4.
Purchases of factors of production
Investment by governments (public
investment), usually on capital goods: roads,
airports, hospitals, schools,…).
Net exports, ie, exports minus imports (XM).
C + I + G +(X – M) = GDP
C. Bordoy
UWC Maastricht
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
GDP: the market value of all final goods
and services produced in a country over a
time period (usually a year).
Remarks on Investment:
1.
2.
Investment is carried out also by
governments, but included under G.
Investment in capital includes only spending
on physical capital, thus excluding:


Investments in human capital
Investments in natural capital
C. Bordoy
UWC Maastricht
Income approach. It adds up all income
earned by the factors of production
within a country over a time period.
National income = wages+rent+interest+
profits ≠ GDP
In order to calculate GDP, some
adjustments need to be made to national
income.
2.
C. Bordoy
UWC Maastricht
3.
Output approach. Measures the value of
each good and service produced in the
economy over a time period (a year) and
then sums them up to obtain the total
value of output produced.
It calculates the value of output by economic
sector, such as agriculture, manufacturing,
transport, banking, etc. This is then added
up to obtain the value of output for the
entire economy.
.
C. Bordoy
UWC Maastricht
GDP and GNI/GNP

In the real world, the value of output is not
always equal to the total income generated in
producing that output:
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Output produced by factors of production owned by
foreigners (a US multinational in India that remits its
profits to the US). Does this profit count as Indian or
US income?
A Spanish worker in Germany that sends a large part
of his income to his family in Spain). Should ths
income be counted as Spain’s or Germany’s income?
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Domestic (GDP) means that output has been
produced by factors of production within the
country, regardless of who owns them.
National (Gross National Income/Product)
means that the income is the income of the
residents in that country, regardless where this
income comes from.

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Profit remitted to US: included in Indian GDP but part
of US’ GNI, as it is income received by US’ residents.
Value of output produced by Spanish worker is
included in Germany’s GDP but his income sent to
Spain is part of Spain’s GNI.

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GNI or GNP is the total income received
by the residents of a country. It is equal to
the value of all final g&s produced by the
factors of production supplied by the
country’s residents regardless where they
are located.
GNI = GDP + Income from abroad – income
sent abroad
Nominal and real

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Nominal value is value measured in terms of
prices that prevail at the time of measurement.
If nominal GDP increases in a year, the
increase may be due to
1.
2.
3.
changes in the quantities of output produced or
changes in the prices of g&s or
changes in both.
We are interested in knowing how much the
quantity of output has increased, so we need a
measure of GDP that is not influenced by price
changes.
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Real value is a measure of value that takes into
account changes in prices over time. It allows us
to make meaningful comparisons over time in
the value of any variable that is measured in
money terms.
Nominal GDP (GNI) is measured in terms of
current prices and it does not account for
changes in prices.
Real GDP (GNI) is a measure of economic
activity that has eliminated the influence of
changes in prices.
Total and per capita
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Per capita=per person or per head.
GDP per capita = Total GDP / total
population.
Why are per capita measures important:
1.
Different population sizes accross countries
Population
Country A
1 million
Country B
2 million
GDP
€ 10 billion
€ 10 billion
GDP per capita
€ 10 000
€ 5 000
2.
Population growth. Changes in the size of
GDP per capita depend on the relationship
between growth in total GDP and growth in
population:


If total GDP increases faster than the population,
then GDP per capita increases.
If population increases faster than GDP, then
GDP per capita decreases.
Gross and net
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The term ‘gross’ is related to spending to
produce capital.
Physical capital has a finite life. Within a year,
some of the capital goods become worn out and
are thrown away. This worn out capital is called
depreciation.
Total/Gross investment = Replacement of worn
out capital goods (depreciation) + New additions
of capital goods (net investment).
Gross inv = depreciation + net investment
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GDP = C + I + G + (X-M), where I=gross
investment. Therefore:
NDP = GDP - depreciation
Evaluation of national income statistics
GDP and GNI are used to make comparisons
among countries and over time and we use
them as a measure of standards of living.
However, they have two problems:
1. NI statistics do not accurately measure the true
value of output produced in an economy.
2. Standards of living depend on a variety of
factors which are not measured by NI statistics.
Why GDP/GNI do not accurately measure
output
1.
2.
Non-marketed output: output of g&s that is not
traded in the market and does not generate
any income. Example: one’s own work on
repairing one’s home.
Output sold in underground (informal=parallel)
markets. Goods are traded in markets and
generate income but they go unrecorded and
are not included in the statistics. It includes:

Legal g&s (reselling a good at a higher price when
there is a price ceiling, a plumber not reporting
income to avoid paying taxes)
C. Bordoy
UWC Maastricht
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3.
4.
5.
Illegal g&s, such as drugs.
Quality of g&s are not accounted for.
Technological advances often permit improved
products to be sold at lower prices. This
provides consumers with benefits which do not
show up in statistics.
Negative externalities nor the depletion of
natural resources are accounted for. They
reduce society’s well-being but is not reflected
in GDP/GNI.
Differing domestic price levels
C. Bordoy
UWC Maastricht
Consider two countries with GDP per capita=$1000
producing only one identical good
Country A
Country B
Price
$100
$200
Number of units
country can afford
10
5
Country A has a greater purchasing power (the quantity of
g&s that can be bought with money) than country B,
and thus a higher standard of living than the population
of country B. If differences in price levels across
countries are not accounted for, conclusions about
standards of living are misleading.
Solution: to convert GDP/GNI values using special
exchange rates (purchasing power parities).
C. Bordoy
UWC Maastricht
Why GDP/GNI cannot accurately measure
standards of living
1.
2.
3.
They do not consider the composition of output
(weapons, education, health…). One country
may have a lower per capita GDP than another
but higher levels of merit goods provision.
They cannot reflect achievements in levels of
education, health and life expectancy, with a
great impact on standards of living. The Human
Development Index is a better measure.
No information on the distribution of income
and output.
C. Bordoy
UWC Maastricht
4.
5.
They do not take into account increased
leisure. The average number of hours worked
per week has decreased in many countries,
with the number of leisure hours increasing.
This contributes to higher standards of living,
but is not accounted for in GDP/GNI.
They do not account for quality of life factors,
such as: crime rate, well-functioning
institutions, , degree of political freedom,…
C. Bordoy
UWC Maastricht
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Comparisons over time and between
countries
Even when using real values of income
and output comparisons of real GDP over
time may be misleading. An increase in
real GDP for a particular country may over
or underestimate the true change in the
population’s standard of living.
The validity of international comparisons is
limited by the factors mentioned above.
C. Bordoy
UWC Maastricht
Green GDP
Measures of GDP and GNI are subject to the
following limitations:
 They do not account for the loss of
environmental resources and losses in
environmental quality.
 They include expenditures undertaken for the
purposes of cleaning up pollution as increases in
the value of national output.
As a consequence, the true value of output and
well-being is overestimated.
C. Bordoy
UWC Maastricht
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Environmental economists have been working
on methods to develop ‘green’ accounting
methods. The idea is to make the link between
the economy and the environment more visible
in measures of aggregate income and output, so
that policy-makers become more aware of the
need for policy efforts to preserve the
environment.
Green GDP = GDP – the value of environmental
degradation
Green GDP = GDP – the value of environmental
degradation – P, where P= all expenditures
resulting from cleaning up pollution.
C. Bordoy
UWC Maastricht