National Income Accounting Meaning Net Value of all economic goods and services produced within the domestic territory of a country in an accounting year plus net factor income abroad. FC (NI =NNP ) NI = Net National Product at Factor Cost (NNPFC) Evaluating short run performance Economic welfare Forecast future demand Sectoral distribution Significance Formulating economic policies Highlights Income distribution and the possible inequality International Comparisons Projections about the future development Important pillars of National Income Concepts The term Gross is inclusive of depreciation or Capital Consumption Gross v/s Net Allowance (CCA). The term Net is exclusive of depreciation. Net = Gross - Depreciation Domestic v/s The term ‘national’ refers to normal residents of a country who may be within or outside the domestic territory of a country. Domestic means National domestic territory or resident production units. Difference between National and Domestic is Net Factor income from abroad CA SAMIKSHA SETHIA NFIA is the difference between the aggregate amount that a country's citizens and companies earn abroad, and the aggregate amount that foreign citizens and overseas companies earn in that country. NFIA = Factor income earned from abroad - Factor payments made abroad Factor Cost Total cost of factors of production i.e., land, labour, capital and entrepreneurship is known as Factor Cost. v/s he market price of the goods and services will include indirect taxes Market Price like product taxes. Market Price = Factor Cost + Net Indirect Taxes = Factor Cost + Indirect Taxes – Subsidies Value added Value added means the difference between value of output and purchase of intermediate goods. v/s Intermediate consumption consists of the value of the goods and services Intermediate consumed as inputs by a process of production. Consumption For example, the value of flour used in making bread would not be counted, as it will be included while bread is counted. Real v/s Nominal GDP measured at current year prices is Nominal GDP. GDP measured at constant prices or a base year price is Nominal GDP GDP. Nominal GDPt = Pt × Qt [Pt= Prices in year t , Qt = Quantity produced in year t] CA SAMIKSHA SETHIA Real GDPt = PB × Qt [PB = Prices in the base year] Mixed income of Mixed income of self-employed refers to the incomes of the self-employed persons who use their own land, labour, capital self employed and entrepreneurship to produce various goods and services. It comprises imputed factor incomes (rent, wages, profit and capital). Circular Flow of income Continuous circulation of production, income generation and expenditure involving different sectors of the economy. Production of goods and services Disposition Distribution as Consumption / factor Investment incomes Methods of NI computation CA SAMIKSHA SETHIA Value Added method Income Method Expenditure Method • Identifying the producing • Factor Payment or • Sum of expenditure incurred enterprises and classifying Distributed Share method by all economic units them into different sectors • Sum of Factor incomes paid • Final Consumption • Estimating the gross value to all factors of production Expenditure = Private Final added (GVAMP) by each • NNPFC or National Income = Consumption Expenditure producing enterprise Compensation of employees (PFCE) [C] + Government • Gross value added (GVAMP) = + Operating Surplus Final Consumption Value of output – (rent + interest+ profit) Expenditure [G] Intermediate consumption = + Mixed Income of Self- • Gross domestic fixed capital (Sales + change in stock) – employed formation [I]: expenditure on Intermediate consumption + Net Factor Income from investments • Estimation of National Abroad • Net exports[X-M]: Exports- income Imports • Net value added (NVAMP)= • GDPMP = C+I+G+(X-M) Σ (GVAMP) – Depreciation • NNPFC = GDPMP - • National Income (NNPFC) = Depreciation - NIT +NFIA NVAMP - NIT + NFIA Limitations Limitations of GDP Conceptual difficulties in NI measurement Inadequate measure of welfare lack of an agreed definition Hidden production distinction between final goods and intermediate goods, Non-market production issue of transfer payments Economic bads difficulty of incorporating distribution of income Economic welfare activities valuation of government services Negative impacts of high crimes services of durable goods CA SAMIKSHA SETHIA .