CHAPTER 2 BASIC CONCEPTS OF NATIONAL ACCOUNTS AGGREGATES Introduction 2.1 Various concepts of national income and taken of the rental of buildings which are related aggregates used in national accounts owned and occupied by the owners connote a particular meaning which may not themselves. Own account construction necessarily conform to the one used in activities are also similarly to be included. common parlance. It is, therefore, necessary However, certain other activities like services that these are made familiar to the users to of house-wives are excluded from production enable them to appreciate these in right mainly due to the problem of measurement. perspective. It is with this objective that it Also excluded are illegal activities such as has been considered necessary to refer to smuggling, black marketing, etc. these in this publication. The basic concepts and definitions of the terms used in national 2.4 Another important feature of the measure is accounts largely follow those given in the that it is an unduplicated value of output or in SNA. It is intended to give in the following other words only the value added at each paragraphs the major concepts used in stage of processing is taken into account National Accounts Statistics and the inter while measuring the total, i.e., in the relationship particularly of those relating to measurement of national output a distinction macro-economic aggregates of national is made between "final" and "intermediate" product, consumption, saving and capital products and unduplicated total is one that is formation. confined to the value of the final products and excludes all intermediate products. To National Product use a simple example, if the production 2.2 National product by definition is a measure in process during a year involves the production monetary terms of the volume of all goods of wheat, its milling into flour and the baking and services produced by an economy during of bread which is sold to consumers then the a given period of time, accounted without value of national output should equal the final duplication. The measure obviously has to be value of the bread and should not count the in value terms as the different units of separate value of the wheat and flour which production and different measures of services have been used up in the course of producing are not directly additive. In the case of a bread. Thus the national product is not the closed economy the measure amounts to total value of goods and services produced domestic product. An important characteristic but only the value of the final product of this measure is its comprehensiveness. excluding the value of inputs of raw materials The measure covers all the goods and and services used in the process of services produced by the residents of a production. country. Thus the goods cover all possible items produced, as for example, agricultural National Product and National crops, livestock and livestock products, fish, Income forest products, mineral products, 2.5 The national product measures all goods and manufacturing of various consumer items for services arising out of economic activity while consumption, machinery, transport national income is the sum of all incomes as equipments, defence equipments etc., a result of the economic activity. These two construction of buildings, roads, dams, are synonymous. Since the production of bridges etc. The services similarly cover a goods and services is the result of the use of wide spectrum including medical and primary factors of inputs, namely, capital and educational services, defence services, labour, along with the raw materials, the financial services, transport services, trading process automatically generates income. services, domestic services, sanitary services, This income is in the form of return to capital government services, etc. and labour used in production process. For example the total product originating in a 2.3 All goods and services produced during the firm making steel could be obtained by period have to be included whether they are adding the total product and then deducting marketed i.e., exchanged for money or the intermediate product to obtain the value bartered or produced for own use. For added. The value added of this firm consists example, some of the products of agriculture, of the income that accrued in the course of forestry and fishing are used for own production, namely, wages and salaries and consumption of producers and therefore an operating surplus. Thus the product of a firm imputed value of these products are also to must be income to someone whether it is be included. Similarly, account must also be their employees in the form of employment National Accounts Statistics-Sources and Methods, 2007 Î 22 CHAPTER 2 income or to the owners in the form of gives the national product. This production operating surplus. Hence, the unduplicated process generates a given amount of money production is equivalent to the income which income which is distributed by the productive accrues to the factors of production. In other units to the factors of production, namely, words national income of a country can also capital and labour. The measure of income be viewed in terms of the money value of this way indicates the share of national income flowing from the producing units to product distributed to the factors of factors of production. National income is not production or in other words the national simply an aggregate of all incomes. It income by factor shares. The income thus includes only those incomes which are received by the factors of production is then derived directly from the current production spent either by the labour in their capacity as of goods and services called factor incomes. households in terms of acquisition and Other forms of income such as old age consumption of goods and services or by the pensions, education grants, unemployment producers in acquiring more capital and thus benefits, gifts etc., cannot be regarded as increasing the physical assets of their payments for current services to production. production units. The national income by They are paid out of factor incomes and are definition is the same whether measured at called transfer incomes. Payments for which the point of production or at the point of no goods or services are received in return income generation or at the point of final are transfer payments. The national income, utilisation. In other words the total of net being the value of goods and services output, income flows and final expenditure becoming available cannot include both factor will be identical. The significance of each incomes and transfer incomes. arises from the fact that they reflect total operations of the economy at the levels of National Product and Expenditure three basic economic functions, namely, 2.6 The production within the economy over a production, distribution and disposition. given period of time is spent either for consumption of its members or for addition of Production fixed assets or for addition to the stock of 2.8 Although national income can be measured in existing productive assets within the country. any one of the three alternative approaches Hence, production can also be measured by but if a complete analysis of the economy is considering the expenditure of those who the object then it should be measured by all purchase the finished or final goods and the three different approaches. For services. The national expenditure is the measurement of national income at the point sum of expenditure of all spending of of production, the method generally followed institutional sectors viz., government, is to divide the whole economy into a given households and enterprises. Here also, it is set of economic activities and to estimate the necessary to include only the expenditures on total value of output and the corresponding "final use" in order to avoid duplication i.e., value of inputs of raw materials and services one has to omit the network of intermediate used for production and then arrive at the sales of all products needed in further value added of each sector as a total value of production. The expenditure on final goods output minus the value of inputs of raw and services may be purely for consumption materials and services. In the case of purposes like consumption of food, clothing, services the value added is measured in shelter; services etc., or for capital formation terms of the total amount of money paid in such as addition to buildings, plant, return for the services received minus the machinery, transport equipment, etc. Some cost of inputs like expenditure on transport, goods may not be immediately sold and may advertisement, and other miscellaneous be kept aside as stocks. These goods which services. are added to stocks are also accounted for as final expenditure. Forms of income 2.9 As has already been pointed out the net Production/Income/Expenditure value added available for each unit of 2.7 It may be noted from the above discussion production is equal to the amount of income that the national income of a country can be generated by the unit in the process of measured in three different ways, from the production. This income is distributed angle of production, from income generation between the two primary factor inputs, and from final utilization. These three forms namely, capital and labour. In other words, are circular in nature. It begins at the income is distributed in the form of either production stage where the productive units capital income to the owner of the capital or engage capital and labour and turn out goods labour income to the labour employed. The and services, the total measure of which distinction between employment income and National Accounts Statistics-Sources and Methods, 2007 Î 23 CHAPTER 2 profits (operating surplus) cannot be made in televisions, automobiles, etc.