National Inc

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NATIONAL INCOME ACCOUNTING CONCEPTS AND ITS MEASUREMENT

GROSS DOMESTIC PRODUCT AT MARKET PRICE

It is defined as the market value of the output of final goods and services currently produced by all theproducers in the domestic territory of a country during an accounting year.

In order to calculate the value of gross domestic product the quantum of goods and services produced is

multiplied by the price.

GDP = P X Q

1. GROSS NATIONAL PRODUCT AT MARKET PRICE

It is the sum total of market value of all final goods and services produced during a year by normal residen

of the country in the domestic territory as well in the rest of the world.

If net factor income from abroad is positive gross national product would be greater than gross domestic

product. On the other hand, if net factor income from abroad is negative gross national product would be lthan the gross domestic product.

GNP (mp) = GDP (mp) + NFIA

GDP (mp) = GNP (mp) - NFIA

2. NET NATIONAL PRODUCT AT MARKET PRICE (NNPat mp)

Net national product at market price measures the value of final goods and services

produced by the normal residents in the domestic territory and abroad in an accounting year

after worn out capital goods have been replaced.

NNP (mp) = GNP (mp) - Depreciation.

3. NET DOMESTIC PRODUCT AT MARKET PRICE.(NDP) (mp)

It is defined as the market value of final goods and services produced in the domestic

territory of a country by its normal residents and non residents during an accounting yearless of depreciation.

NDP (mp) = GDP (mp) Depreciation.

NDP (mp)= NNP(mp) - NFIA

4. NET DOMESTIC INCOME OR NET DOMESTIC PRODUCT AT FACTOR

COST(NDP) (fc)

Net domestic income measures the income earned by the suppliers of factors of

production used to produce the economys total output of final goods and services for the

year. It is called domestic income. The domestic income is the income generated within the

domestic territory of the country by all the producers in an accounting year.

Net domestic income or NDP at factor cost includes the following:

Wages or compensation of employees. Rent interest and profit or operating surplus.

And mixed income.

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NDP (fc) = NNP(fc) NFIA.

5. GROSS DOMESTIC PRODUCT AT FACTOR COST(GDP) (fc)

it is the sum of net value added by all the producers in the domestic territory of a countryinclusive of depreciation during an accounting year.

GDP (fc) = NDP(fc) + depreciation

7. NET NATIONAL PRODUCT AT FACTOR COST OR NATIONAL INCOME

National income is defined as the factor income accruing to the normal residents of thecountry(rent, interest profit and wages) during a year. It is the sum of domestic factor

income and net factor income from abroad.

NNP (fc) = NDP (fc) + NFIA.

NI = Domestic factor income + NFIA.

8. GROSS NATIONAL PRODUCT AT FACTOR COST OR GROSS

NATIONAL INCOME .GNP(fc)

It is defined as the sum of gross value added at factor cost by the normal residents of a

country during a year and net factor income from abroad.

GNP (fc) = GDP ( fc) + NFIA.

9. NET NATIONAL DISPOSABLE INCOME:

National disposable income refers to that income at market price available to a country for

disposal. It is the sum total of national income net indirect taxes and net current transfers

from the rest of the world.

Net National Disposable income = NNP at mp + net current transfers from the rest of

the world.

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MEASUREMENT OF NATIONAL INCOME

Value added method/value of output/product method

Value of output is the market value of all goods and services produced by an enterprise

during an accounting year.

Value of output in other words is the output evaluated at the prices prevailing in the market.Value of output is worked out by multiplying physical output of goods and services with

the market price.

Value of output = price X quantity

Since output is evaluated at prices prevailing in market, it is called value of output at

market price.

Alternatively value of output is sum of sales and changes in stock.

Value of output = sales + changes in stock

Value added refers to the addition of value to the raw materials by a firm by virtue of

its productive activities.

It is the difference between value of output and value of intermediate consumption.

The contribution of a firm to its National Income is value added by it and not its value ofoutput because value of output includes value of intermediate inputs purchased from other

firms.

A firm purchases intermediate goods from other firms and hires factor services to produce

goods and services. During production process a firm merely adds value to intermediategoods when it transforms intermediate inputs into output with the help of factors of

production. This is called value added by a firm. To find out value added by a firm value of

intermediate inputs should be deducted from value of firms output because intermediateinputs are not produced by it but purchased from other firms.

Value added = Value of output - Intermediate consumption.

Output method measures National Income from output side. It measures the contribution of

each producing enterprise in the domestic territory of the country.The following are the steps involved in the estimation of National Income

Steps

1. 1dentify all the producing units in the domestic economy and classify them into 3industrial sectors such as primary secondary and tertiary sectors.

2. Estimate Gross value added by deducting the value of intermediate consumption.

3. Estimate Net Value added by deducting the value of Depreciation4. Estimate Net Value added at Factor cost by deducting NIT.

Therefore NVA (fc) = Value of output Intermediate consumption depreciation -

NIT

By adding up the net value added at factor cost of all industrial units in the domestic

territory of the economy we get NDP (fc)

5. To estimate the National Income we add NFIA to NDP (fc).

NNP (fc) = NDP (fc) + NFIA.

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Precautions to be taken while adopting this method:

1. Value of sale and purchase of second hand goods is not included in value added.2. Commission earned on account of the sale and purchase of second hand goods is

included in the estimation of value added.

3. Own account production of goods of the producing units is taken into account whileestimating the value added.

4. Value of intermediate goods is not included in the estimation of value added.

5. Imputed rent of owner occupied house is also taken into account.

Problem of double counting:

Counting the value of goods and services more than once is called double counting. This

leads to the over estimation of the value of goods and services produced. While calculatingthe value of output the value of intermediate goods are taken into consideration the reason

for double counting is that every producer treats the commodity he sells as final product

although the buyers may use it as intermediate product For example IF Firm A produces

raw cotton assuming that uses no intermediate input and sells it for Rs 1000 to firm B. FirmB converts it to cotton cloth and sells it for Rs 1500 to C. Firm C manufactures cotton cloth

and sells it for Rs 2200 to firm D. Firm D produces garments and sells them for Rs.3500 tothe consumers. the total value of these transactions or gross value of output in

Rs.8200(1000+1500+2,200+ 3500) in which raw material has been counted four times

cotton yarn three times, and cotton cloth 2 times. on the contrary value of final goods

which the economy produced is Rs.3500. thus while calculating the national income if wetake into account Rs.8200 (value of intermediate and final goods) it will lead to double

counting and duplication. Actually only Rs.3500 should be counted since the economy has

produced final goods worth Rs 3500 and not worth Rs 8200. it is therefore estimated thatthe element of double counting erupting in final product approach should be avoided. the

problem of double counting is solved by value added approach according to which chances

of double counting are automatically eliminated.The problem of double counting is solved by value added method by taking the value of

final goods and services or the value added at each stage should be taken into consideration

the contribution of each producing units to current flow of goods and services is grossvalue added by and thus it gives the actual value of goods and services produced in an

economy during a given year. The counting of the value of the commodity more than once

leads to the overestimation of the value of goods and services produced.

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II Income method

Income method measures National Income from the side of the payments made to the

primary factors of production for their productive services in an accounting year.If factor income generated by all the production units in the domestic territory is estimated

and aggregated for an accounting year we ger NDP(fc) or domestic income.

The components of domestic income area)Compensation of employees : It is the reward paid to the factor labour for its productive

services. it includes Compensation of employees(wages and salaries )in cash and in kind

and employers contribution to social security schemes

Note : Salaries and allowances paid to members of Parliament and State Legislature pay

and allowance to the President of India State Governors, ministers of Central and State

Cabinets are also treated as compensation of employees.Old age pension is a transfer income but retirement pension is a factor income.

employees contribution to social security is not included separately as it is a part of Wages

and salaries in cash. example income tax insurance premium etc.

traveling allowance (reimbursed) due to business is not included it is a part of intermediateconsumption.

compensation to an injured worker is a transfer incomeloan amount is not included as it has to be paid. interest on it not paid is included.

b)Operating surplus

C)Mixed Income of self employed:

Steps involved

1. Identity the producing enterprises which employ factors of production

2. classify factor payments and estimate payments,Factor payments are generally classified into

Compensation of employees(wages and salaries )

Operating surplus (Rent + Interest + profit + Royalties)Mixed Income of self employed.

Summing up all the factor payments made within the domestic territory we get

domestic factor Income or NDP(fc)

3.National Income = NDP(fc) + NFIA.

Precautions to be taken while using this method:

1 .Transfer earnings like old age pension unemployment allowance scholarships pocketexpenses etc should not be included in national income.

2 .Income from illegal activities like smuggling theft gambling etc should not be included

in national income. Income generated in terms of black money is also not accounted.3. Sale proceeds of second hand goods like second hand car, second hand house, second

hand TV sets are not included in national income. But commission paid on their sales is

included in the national income.

4. The sale proceeds of bonds and shares are not included as they are not related to flow ofgoods and services.

5 .windfall gains like lotteries and capital gains should not be included.

6. Imputed rent of owner occupied house is included in national income.

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7. Corporate tax dividends undistributed profit are all components of corporate profits.

Once profit is included in the estimation of national income any of these components

should not be included.8. Gift tax wealth tax are paid not out of the current income but our of past savings of the

tax payer. Therefore these are not to be included in the estimation of national income.

III Expenditure methodThe expenditure method measures all the final expenditure on GDP. Expenditures are

classified as Private final consumption expenditure Government final consumption

expenditure Gross domestic capital formation and Net Exports.

Steps involved

1 .Identify all economic units or institutional units incurring final expenditure Example

households, firms and government sector.

2. Classify final expenditure

Private final consumption expenditure In this we include consumption expenditure of

household and non profit institutions serving households on all types of consumption goods

that is durables semi durables non durable services.

Government final consumption expenditure : the component include governmentspending on goods and services. It includes the purchase of currently produced goods and

services in the market by the government compensation of employers paid by thegovernment and also direct purchases abroad by the government.

Gross capital formation : It is Gross domestic fixed capital formation and changes in

stock,

Gross fixed capital formation consists of expenditure on construction and machinery.

Changes in stockrefers to the physical change in stocks of inventories like raw materials

semi finished goods and finished goods. It is the difference between closing and opening

stock.

GCF

Gross fixed capital formation changes in stock

Construction

Business fixed investmentResidential construction investment

Public investment

Net Exports: It is the difference between exports and imports of a country.

The sum of all the expenditure gives you GDP(mp)

3.Deduct depreciation from GDP(mp) to derive NDP(mp)

4.Deduct NIT from NDP(mp) to get NDP(fc).

5.Add NFIA to NDP(fc) to get NNP(fc)

Precautions to be taken while using the expenditure method

1. Final expenditure is to be taken into account to avoid double counting.

2. The Intermediate consumption is not included in the estimation of National Income3. Expenditure on shares and bonds is not included in total expenditure as they are paper

claims.

4, Expenditure on transfer payments by the government is not included in total expenditure

example old age pension scholarship etc.

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