National income accounting Notes
National income accounting
National earnings refer back to the sum of income earned by means
of all of the people of a state in a particular period of time. National
earnings facts famous the entire economic overall performance of the united
states as a whole. National earnings represent overall receipts, total
expenditure, and the full cost of production. Since a person's profits are every
other man or woman’s expenditure and every commodity is traded at its
marketplace rate, national income, national expenditure, and national product
are the same. Every u . S . Produces goods and services. Therefore, in a
selected time frame, the entire cost of profits and expenses incurred at some
point of the buying and selling of these goods and offerings is country-wide
profits.
Symbolically,
NI = Y1+Y2+Y3+……. Yn.
According
to Alfred Marshall, “The labor and capital of a country acting upon
its natural resources produce annually a certain net aggregate of commodities,
material and immaterial including services of all kinds. This is the net annual
income or revenue of a country or the national dividend.”
According to Simon Kuznets, “National income is the net output of commodities and services following during the year from the country’s productive system in the hands of the ultimate consumers.”
VARIOUS CONCEPTS OF NATIONAL INCOME:-
A. Gross Domestic Product (GDP):-
GDP
is defined as the market value of all the final items and offerings produced
within the home territory of a country in a year. It may be calculated via
multiplying all the products and services produced within the country via their
respective costs and adding them.
Symbolically,
GDP = P1Q1+P2Q2+P3Q3+……….. +PnQn within the country
GDP consists of most
effective the very last items and services. All the intermediate goods and offerings are excluded from the size of GDP.
Intermediate goods are those goods that are produced by one firm and used for
similarly processing via every other firm.
Features
of GDP:-
1. GDP
is the market value of all of the very last items and services produced within
the country.
2. GDP
is calculated on the idea of the present-day marketplace rate.
3. It
consists of simplest those goods that have marketplace price and brought for
sale.
4. Transfer
bills like pension, allowances, and so forth. Are not included in GDP.
5. GDP
does now not encompass capital profits.
6. Whether
the resources are domestically earned or overseas earned does now not matter in
GDP.
B.
Gross National
Product (GNP):-
GNP is defined as the
market value of all the final goods and services produced in a year by
domestically owned resources and foreign sectors.
Symbolically,
GNP = GDP + NFIA
Where,
NFIA = Net Factor Income derived from Abroad.
GNP is a broader concept than GDP because it includes Net Factor Income from
Abroad.
Features of GNP:-
1) It
is calculated on monetary phrases.
2) It
consists of only the final items and offerings.
3) The
intermediate goods are excluded to avoid double counting.
4) It
consists of earnings earned through the residents of a country inside a rustic
and overseas.
5) It
consists of factor payments to foreigners, by the way, the country.
6) It
does not include capital profits and switch bills.
7) It
consists of only those goods which have marketplace prices and are brought for
sale.
C. Net National Product (NNP/ NDP) :-
NNP
refers to the overall market cost of all the goods and services produced
through the elements of manufacturing of a country or other polity in the
course of a given term minus depreciation. Similarly, NDP corresponds to GDP
minus depreciation. Depreciation describes the devaluation of constant capital
through wear and tear associated with its use of inefficient interest.
In
countrywide income accounting, NNP and NDP are given by the subsequent
formulation:-
NNP / NDP = P1Q1+P2Q2+………
+PnQn+(X-M)+NFIA -Depreciation or CCA.
Where CCA = Capital Consumption Allowance.
OR,
NNP/ NDP=C+I+G+(X-M)+NFIA - D or CCA.
D. Personal Income (PI):-
Personal
income is shipped to exclusive persons or households. All quantities of
country-wide income do no longer go to folks. Taxes are imposed on profits, the
provident fund is deducted, alternatively, transferable bills like pensions,
elderly allowances, unemployment allowances, and so forth. Are given through
the governments. So, they ought to be adjusted. PI can be represented through
the following components:-
PI = NI – Income tax - undistributed earnings – social securities +
transferable bills.
E. Disposable income (DI):-
The
income left after paying direct taxes from private income is called DI. It is
because all of the income earned via men or women and households are not
available for intake. It is expressed as:-
DI = PI – Direct taxes.
F. Per-Capita income or average profits (PCI) :
It
measures the common income earned per character in a given region (city,
location, u . S ., etc.) in a unique yr. It is calculated by dividing the
place's overall income with the aid of its total population. This is used to
compare the wealth of one populace with the ones of others. PCI is frequently
used to measure a rustic's preferred of living. It is generally expressed in
terms of a normally used worldwide currency which includes the Euro or US
greenback because they are widely recognized.
PCI
= NI ÷ Total population.
Nominal GDP and Real GDP
NOMINAL GDP:-
Nominal GDP is defined as the GDP at contemporary marketplace fees. It consists of all the modifications in market charges. If the price stage will increases final the output is steady, nominal GDP will increase, and vice-versa. Nominal GDP offers the misleading influence of the living standard and monetary overall performance of the country. It does not mirror the correct economic overall performance of the country And the living preferred of human beings.
It is calculated as follows:-
Nominal GDP = P1Q1+P2Q2+………… +PnQn
Where, P1, P2, Pn = present-day marketplace prices of products and services.
Q1, Q2, Qn = portions of the products and offerings produced
within the contemporary 12 months.
REAL GDP:-
Real GDP is defined because the GDP of the contemporary year is evaluated on the market charge of any base year. In different phrases, the real GDP is the GDP calculated at a regular price. Real GDP is used to make an accurate estimate of the dwelling general and the monetary performance of the united states. Nominal GDP changes time beyond regulation but actual GDP remains identical.
It is calculated as follows:-
Real GDP = P1Q1 + P2Q2 +………. +PnQn
Where, P1, P2, Pn = base year's price of the goods and services.
Q1, Q2, Qn = portions of the goods and offerings produced within
the contemporary yr.
GDP DEFLATOR:-
The GDP deflator is defined because the measure of the relative
adjustments within the modern-day stage of fees in comparison to the base 12
months expenses. It is the ratio of nominal GDP to real GDP increased via one
hundred. It is used to calculate the exchange inside the charge level or the
price of inflation inside the economic system.
GDP deflator = Nominal GDP ÷ Real GDP × 100
Rate of inflation = exchange in GDP deflator ÷ GDP deflator of preceding 12 months × 100
MEASUREMENT OF NATIONAL INCOME:-
Production of products and services gives rise to earnings,
profits give upward thrust to the demand for items and offerings, demand gives
rise to expenditure and expenditure gives upward push to similarly production.
So, there may be around the drift of manufacturing, income, and expenditure. On
the premise of these three related flows, countrywide income may be measured
via the subsequent three methods which can be defined as follows:-
A.
Product method:-
The product method measures country-wide earnings on the section
of production in a circular float. This method measures national profits from
the entire sum of the marketplace fee of all the final goods and offerings
produced in the financial system. In this technique, the economy is divided
into 3 sectors: Primary Sector (agriculture, forestry, fishing, mining, and so
forth.), Secondary Sector (production, creation, electricity, water delivery,
gas, and so forth.) and Tertiary Sector (banking, delivery, coverage,
communication, exchange, commerce, and so forth.). The money cost of all the
overall productivity of each quarter is calculated and summed up to discover
GDP. This method is generally used in many countries but there are
opportunities for double counting. So, a good way to avoid double counting, the
following opportunity techniques are used:-
1. Final product method (approach):-
In this approach, national income is estimated via finding the
market cost of all of the very last goods and services produced in a financial
system in a year. All the intermediate goods are excluded while calculating
country-wide income. While calculating NI through the product approach there
exists the trouble of double–counting. In order to keep away from it, only the
very last product have to be blanketed. The system for calculating NI by means
of this technique is as follows:-
GDP = P1Q1+P2Q2+….. + PnQn
GNP = GDP+NFIA
NNP = GNP – Depreciation.
NNP after factor value = NNP – Net Indirect Taxes.
NI = NNP at aspect cost.
2. Value-introduced technique:-
In this technique, the value created at specific tiers of
the production is counted for estimating NI. According to this approach, GDP is
the sum of overall cost brought through the exceptional producing unit, of a
country in their production procedure. The value brought is the addition to the
price of uncooked materials and other inputs for the duration of the
manufacturing method.
Gross Value Added = Value of output – Cost of intermediate goods
The
following formula shows how national income is calculated by the value-added
method.
GDP = Gross value added in different sectors within the economy.
GNP = GDP + NFIA
NNP = GNP – depreciation.
NNP after cost = NNP – Net indirect taxes
NI = NNP at factor cost.
B.
Income
approach:-
The income approach measures NI from the aspect of issue income.
This approach is likewise known as the element fee technique. According to this
technique, the earning acquired by way of all the citizens of a rustic for his
or her efficient offerings during 12 months are added to attain NI. This method
includes earnings earned by all of the elements of production in the form of
rent, salary, salaries, hobby, and so on.
The components of calculating NI through the earnings approach is as follows:-
GDP = wages + salaries + interest + rent + profit + depreciation + net indirect
taxes.
GNP
= GDP + NFIA
NNP = GNP – depreciation
NNP after factor cost = NNP – Net indirect tax
NI = NNP at factor cost
Components of national income
in income method:-
1) Wages
and salaries:-
Wages
and salaries earned via laborers and employees are included within the NI. The
extensive additives of wages consist of all the forms of remuneration of work.
2) Interest:-
Interest
acquired from the capital is included within the NI. It is expressed in the net
phrases instead of the gross terms.
3) Rent:-
Rent acquired from land, building, manufacturing unit, etc. Are covered in NI.
It is the earnings earned by way of the persons for the usage of the real
assets.
4) Profit:-
Profit includes dividends, earnings tax, and undistributed profit. The profits
earned from self–employment is also included in NI.
5) Depreciation:-
The depreciation amount is deducted to get a net national product from the
gross country-wide product.
6) Net
indirect taxes:-
Net indirect tax is equal to oblique taxes minus subsidies. The oblique tax
consists generally of fee added tax, excise and actual belongings taxes.
7) Net
factor income from abroad (NFIA):-
NFIA is equal to the earnings received by way of the residents of a
rustic from overseas minus income paid to the foreigners.
C.
Expenditure technique:-
In order to calculate NI through the expenditure method, the
economic system is divided into four fundamental sectors:- family, government,
business, and overseas sectors. GDP is the sum general of expenditure of these
4 sectors on very last items and services produced within the domestic
territory of a country in 12 months. According to this approach, the sum of
personal intake expenditure, non-public funding expenditure, government
expenditure, and net export gives the GDP quantity. Net exports same as the
total exports minus overall imports. When the internet aspect earnings from
abroad are introduced to GDP, GNP is received. NNP is acquired via deducting
depreciation from GNP. Finally, NNP at issue value is acquired by using deducting
Net Indirect Taxes from NNP. The calculation of NI from this approach is as
follows:-
GDP = C + I + G + (X – M)
GNP = GDP + NFIA
NNP = GNP – depreciation
NNP after thing fee = NNP – Net indirect taxes
NI = NNP at component cost
Components of national income
in expenditure method:-
1) Private
final consumption expenditure:-
This component consists of expenditures on consumer goods and
services like expenditure on food, clothing, facilities, automobiles, medical
care, etc.
2) Gross
private domestic investment:-
This
component includes the total investment made by business firms like the
addition of physical assets, replacement of assets, etc.
3) Government
expenditure:-
This component includes purchases by all levels of government like
expenditure on security, administration, infrastructures, etc.
4) Net
exports:-
Net exports are equal to the total exports minus total imports.
5) Net
foreign income from abroad:-
NFIA is equal to the income received by the citizens of a country
from abroad minus income paid to the foreigners.
6) Net
Indirect Taxes:-
Net indirect tax is equal to indirect taxes minus subsidies. The
indirect tax consists primarily of VAT, excise, and real property taxes.
7) Depreciation:-
The depreciation amount is deducted to get the net national
product from the gross national product.
DIFFICULTIES IN MEASUREMENT OF NATIONAL INCOME:-
1) Double–counting:
It is one of the essential issues within the calculation of country-wide
profits. It refers to the act of such as a commodity inside the calculation of
countrywide income extra than once. The fine way to resolve this trouble is the
value-brought approach.
2) Calculation
of depreciation:-
The depreciation is deducted from GNP to calculate NNP and NI. But it's miles
difficult to estimate the correct depreciation. Depreciation differs from
product to product. It will become similarly complex if the cost of capital
belongings modifications every 12 months.
3) Change
within the charge level:-
NI is measured in financial phrases. The value of money and the extent of price
adjustments every so often. This creates hassle to calculate NI due to the fact
NI modifications without the alternate in output.
4) Illegal
profits:-
Income earned thru unlawful activities such as playing, bribery, smuggling, and
many others. Isn't always protected in NI. Because of this, NI is
underestimated.
5) Unavailability
of reliable statistics:-
NI measurement requires correct and dependable records. But, it's miles tough
to get dependable data in a maximum of the developing economies.
Sometimes people do not offer accurate data about their earnings to
prevent taxes. This reasons problems in the counting of NI.
6) Choice
of technique:-
It is also hard to determine which method is to be used in the calculation of
NI. The popular view is to use product, income, and expenditure techniques
simultaneously depending on the availability of statistics.
7) Inclusion
of carrier:-
The NI is difficult to calculate such as offerings as it does now not supply
any bodily product. There has been a little debates whether to consist of
services within the counting of NI or no longer.
8) Intermediate
goods:-
The general idea of NI is best to consist of the very last items. Intermediate
items are in no way blanketed however it's miles very difficult to
differentiate between intermediate goods and very last items. Many items can be
justified as intermediate or final depending on their use.
DIFFICULTIES IN MEASURING NATIONAL INCOME IN DEVELOPING
COUNTRIES:-
1) A
massive non – monetized zone:-
In growing countries like Nepal, there may be a massive non – monetized
quarter. For instance:- A large part of the production of the agriculture
quarter isn't always added to the market on the market.
2) Illiteracy
and ignorance:-
In many growing countries like Nepal, a large number of humans are illiterate
and ignorant. So, it is hard for them to provide the necessary statistics
concerning their earnings and output.
3) Backwardness:-
In developing countries, people are socially backward. They do not expose their
earnings without problems and correctly.
4) Lack
of occupational specialization:-
In developing nations, people obtain earnings partly from farming, partly from
a task, partially from industries, and many others. So, the calculation of NI
turns very hard because of the lack of occupational specialization.
5) Lack
of green and educated manpower:-
In developing nations, there's a loss of trained and green staff which makes
the calculation of accurate NI difficult.
