National Income Accounting – Purpose in Economic Analysis

What is National Accounting

National Income accounting is referred to the set of methods and principles that are used by the government for measuring production and income or in other words economic activity of a country in a given time period. The various measures of determining national income are GDP (Gross Domestic Product), GNP (Gross National Product) and NNP (Net National Product) along with other measures such as personal income, disposable income.

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Importance of National Income accounting is that it is helpful in facilitating techniques and procedures for measurement of output and income at the aggregate level. It is a process of preparing national income accounts which is based on the principles of double entry system of business accounting.
National Income accounting helps in summarising the economic performance of a country by measuring the national income aggregates for the year.
Government policies are framed on the basis of the data obtained from National Income accounting.

What is National Income Accounting Equation

National Income Accounting Equation is an equation that shows the relationship between income and expense of an economy and other categories. It is represented by the equation
Y = C + I + G + (X – M)
Y = National Income
C = Personal Consumption Expenditure
I = Private Investment
G = Government Spending
X = Net Exports
M = Imports
The most important metrics that are determined by national income accounting are GDP, GNP, NNP, Disposable Income and Personal Income. Let us know more about these concepts briefly in the following lines.

Gross Domestic Product (GDP)

The most important metric that is determined by national income accounting is GDP or the Gross Domestic Product. GDP is defined as the total monetary or the market value of all the final goods and services that are produced within the geographical boundaries of a country.
GDP works as a scorecard which reflects the economic health of a country. It is calculated on an annual basis. GDP helps in estimating the growth rate of a country. GDP can be calculated using the three methods which are expenditures method, production method and income method.
The other indicators of national income are derived from GDP.
GDP can be calculated by two methods:
1. Expenditure approach
2. Income approach
Calculation of GDP by Expenditure Approach is
GDP = C + I + G + (X – M)
GDP = Gross Domestic Product
C = Personal Consumption Expenditure
I = Private Investment
G = Government Spending
X = Net Exports
M = Imports
Income Approach calculation
GDP = private consumption + gross investment + government investment + government spending + (exports – imports).

Gross National Product (GNP)

Gross National Product or GNP is a measure of the total value of all the finished goods and services which is produced by a country’s citizens irrespective of their geographic location. It calculates only the final or finished goods. It signifies how much the citizens of a country are contributing to the economy. It does not include income earned by foreign nationals within the country.
GNP is calculated using the following formulae
GNP = C + I + G + X + Z
Where C = Consumption
I = Investment
G = Government
X = Net Exports
Z = Net factor income from abroad

Net National Product (NNP)

Net National Product or NNP is the total value of all goods and services that are produced in a country during a given period of time minus the depreciation. It is represented as
NNP = GNP – Depreciation

Methods of National Income Accounting

There are three methods of measuring national income and these are:
1. Product Method: In this method a country’s national income can be calculated by adding the output of all firms in the economy to determine the nation’s output.
2. Income Method: This method is used to calculate incomes generated by production, it includes income from employment, rent obtained for buildings, patents and copyrights, return on capital from private sector and public sector, depreciation etc.
3. Expenditure Method: In this method national income is calculated by adding all the expenditures which are done for purchasing the national output.

Functions of National Income Accounting

The basic functions of national income accounting are:
1. To determine the economic status of a country.
2. To provide a basis of evaluation and reviewing of policies that are under implementation.

Uses of National Income Accounting

Uses of national income accounting are as follows:
1. It reflects the economic performance of an economy and shows it strengths and weaknesses.
2. It helps to determine the structural changes that are appearing in the economy.
3. It helps in comparing nations based on national income.
4. It shows the contribution of each sector towards the growth of the economy.

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