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National Income Accounting

National income accounting


A set of rules and definitions for measuring economic
activity in the aggregate economy that is, in the
economy as a whole.

National income accounting is a way of measuring total,


or aggregate production.

Gross National Product (GNP)


GNP

stands for the monetary value of all goods and


services that are:
Currently produced,
Sold through the official market,
Not resold or used in further production,
Produced by the nationally owned resources (factors of
production), and
Valued at the market prices (current or constant).

GNP belongs to the nation, and thus, it must be


produced by its owned factors of production only. Thus,
if an Indian professor takes up a four month Visiting
Professorship in a US University, his income in USA is
the part of Indias GNP and similarly the profit that a
MNC makes in India, is not a part of Indias GNP.

Gross National Product (GNP)


GNP at market price is inclusive of the indirect taxes (Ti),

net of subsidies (S) as it values the goods at the prices paid


by the end users. To get GNP at factor cost (GNPF), one
must deduct net indirect taxes from GNPM:

GNPF = GNPM + S - Ti
GNP@ market price = GNP@ factor cost Subsidies +
Indirect Taxes
GNP@ factor cost = GNP@ market price + Subsidies Indirect Taxes

Net National Product (NNP) & National Income


NNP is equal to: Gross National Product (GNP) less
Allowances for Capital Consumption.
National Income (NI) is the total net value of all goods and
services produced within a nation over a specified period
of time, representing the sum of wages, profits, rents,
interest, and pension payments to residents of the nation.

You can simply calculate NI by subtracting capital


depreciation and indirect tax from GDP.

Gross Domestic Product (GDP)


It refers to the value of the goods and services produced within the

nations geographical territory, irrespective of the ownership of the


resources. Therefore, salary of an Indian visiting professor in USA
is the GDP of USA and the dividend earned by a foreign company in
India constitutes GDP of India.
In view of this, while GNP consists of income produced by the
nations owned resources irrespective of the place of production,
GDP refers to income produced within the nations territory
irrespective of the ownership of the resources that produced it.
The difference between the two concepts is accounted for by the net
factor income earned abroad (NIA). Thus,
GDPF = GNPF -NIA
From the point of view of the employment generation at home, GDP
is more relevant than GNP, and hence, the former often receives a
greater attention than the latter.

Gross Domestic Product (GDP)

The monetary value of all the finished goods and services


produced within a country's borders in a specific time period.
GDP is usually calculated on an annual basis. It includes all of
private and public consumption, government outlays, investments
and exports less imports that occur within a defined territory.

GDP = C + G + I + NX,
where:
"C" is equal to all private consumption, or consumer spending, in
a nation's economy

"G" is the sum of government spending


"I" is the sum of all the country's businesses spending on capital

"NX" is the nation's total net exports, calculated as total exports


minus total imports. (NX = Exports - Imports)

GDP at Market Price

What is GDP@ market price?


GDP@ market price =GDP@ factor cost Subsidies +
Indirect Taxes
GDP@ market price refers to:
The total final output of all final goods and services produced
within the national frontiers of a country by its citizens and
The foreign residents who reside within those frontiers that are
sold at market prices in various markets.

GDP at Factor Price


n GDP@
n GDP@

factor cost =
market price + Subsidies -Indirect Taxes

n Factor

costs: are the actual production costs at which goods


and services are produced by the firms and industries in an
economy.

Factor

costs are really the costs of all the factors of production


such as labor , capital, energy, raw materials like steel etc that
are used to produce a given quantity of output in an economy.
Thus the term GDP@ factor cost refers to the total final
output of all final goods and services produced within the
national frontiers of a country by its citizens and the foreign
residents who reside within those frontiers that are assessed
at production or factor cost prior to leaving their respective
factory gates for various markets where they are bought
and sold.

GDP: Nominal vs. PPP

PPP (Purchasing Power Parity):


The long term equilibrium exchange rate should equal the
ratio of the prices in different countries for the same
goods/services.

Big Mac Index


The Economist's Big Mac index is based on the theory
of purchasing-power parity (PPP) according to which
exchange rates should adjust to equalize the price of a basket
of goods and services around the world.

The real PPP exchange rate calculation


Takes into account a broad range of goods and services
Including both tradable and non-tradable goods/services
Should be updated frequently

Things not included in GDP - 1

Work that is provided in an economy by non-market


transactions such as homemakers and military personnel.
These factors are too difficult to measure.

Illegal activities such as gambling and drug trafficking.


These factors are also difficult to estimate; in addition they
are a "dis-service" to the economy.

Goods and services that are bartered. These were excluded


because they cannot be measured.

Sale of intermediate goods (raw materials).


Sale of used goods (used cars, furniture, etc.).
Purely financial transactions such as sale of stocks and
bonds.
Imports (goods made outside the India).

Problems if they are included in GDP

Counting the sale of final goods and intermediate products


would result in double and triple counting.

There are two ways of eliminating intermediate goods.


The first is to calculate only final output.
A second way is to follow the value added approach.

Value Added Approach Eliminates Double Counting

Calculating GDP: Some Examples

Selling your two-year-old car to a neighbor does not add to GDP.


Selling your car to a used car dealer who then sells your car
to someone else for a higher price, adds to GDP. The value of
the dealer's services is added to GDP.
Selling a stock or bond does not add to GDP.
The stock broker's commission from the sales does add to
GDP.
Social security payments, welfare payments, and veterans'
benefits, are not included in GDP.
Only the cost of transferring is included in GDP.
The work of unpaid house-spouses does not appear in GDP
calculations.
GDP only measures market activities so unpaid value added is
not included in GDP.

Shortcomings of GDP as a measure of economic


well-being:

Only Market Activity is Included in GDP

GDP places no value on leisure

Bads counted as well as Goods


For example, when there is a natural disaster,
increased spending to solve the problems of the disaster
are counted as increased GDP.
No account for ecological costs

Net Domestic Product


NDP,

or Net Domestic Product, unlike GDP, takes account of


capital depreciations, capital goods or part of capital goods that
have been consumed over the year in forms of housing, vehicle,
machinery deterioration and so forth. By subtracting the annual
capital depreciation from the GDP, NDP is more accurate in
measuring economic output.

Capital Consumption Allowances: are the total or aggregate costs


of the wear and tear or depreciation of the capital stock ie
machinery, tools, plants, roads, power grids, buildings, bus fleet,
trains, railways etc within an economy usually within a given year.
Another name for the CCAs is the depreciation of capital stock or
its depreciation costs.
The

reason we use GDP rather than NDP: The capital depreciation


is too difficult to spot from capital goods investments.

Personal Income
It

is the sum of all incomes actually received by all


individuals or household during a given period.
PI = NI social security contributions corporate income
tax undistributed corporate profits + transfer payments

Disposable income
Disposable Income for individuals is the part of total earnings
deprived of all taxes paid and profit reserved for companies,
which is the amount available for spending or saving.
DI = PI - Personal Taxes

Worked Out Example


You have following information (Rs. Crores)
NDP at Market Price

25,21,700

Net Indirect Taxes


Net factor Income from Abroad
Depreciation

3,06,087
-41,482
78,821

Transfer Payments
Population

33,873
98.7 crores

Calculate: (i) GDP at Market Price, (ii) NI (iii) Per Capita Income
(i)
GDP
at
Market
Price
(ii) NI
(iii) Per Capita Income = 22,024.022

26,00,521
= 21,73,771