National Income Accounting

Although Calculation of  National Income Accounting is certifiably not a definite science, it gives a helpful understanding of how well an economy is working and where cash is being created and spent. When joined with data regarding the related populace, information regarding per capita income and the circular flow of income development can be analysed throughout some undefined time frame.

The Calculation of the National Income Accounting algorithm helps analyse  Gross Domestic Product  (GDP), Gross National Product (GNP), and Gross National Income (GNI). The GDP is broadly utilised for financial examination on the homegrown level. It addresses all market worth of the labour and products created inside a particular country throughout a chosen time frame.

Calculations of National Income Accounting Methods

The accompanying techniques are utilised to gauge public pay:

1. Product Method

Commonly known as the value-added method, adding Net value to the product at every stage of production forms the basis for this method. In the value-added method, there are three Industrial sectors that divide an economy for valuation, namely – Agriculture, Fishing, mining, etc.

The circular flow of income is determined by adding the total output of all the companies in an economy. The technique shows how all the sectors contribute to the National Income, thereby showcasing the interwoven status of different sectors with each other 

National Income = (NDPfc) + Net factor income from abroad

2. Income Method

In the income method, the national income is estimated by adding up the pre-tax income created by the people and organisations in the economy. It comprises wages, rent of buildings and lands and capital profits and interest. This method tells the distribution of National income amongst the earnings of different groups under one economy.

Income approach calculation

National Income = Rent + Wages + Interest + Profit + Mixed-Income

3. Expenditure Method

National income is the summation of society’s total expenses that include: 

• Expenditure on personal consumption

• Net domestic investment

• Goods and services expenditure

• Net foreign investment 

It is assumed that the expenditure incurred on a national level is equal to the income earned on the same level.

National income = Expenditure on personal consumption + Net domestic investment + Goods and services expenditure + Net foreign investment

Significance of Calculating National Income Accounting

• The statistics given by National income accounting can be utilised to work on the methodology and strategies used to measure the input and output of an economy.

• Through the analysis of National Income accounting, the government can formulate policies by going through the past years’ data and trends in the economy. It also helps in perceiving the fundamental changes occurring in the economy.

• Calculation of National Income Accounting assists policymakers of the nation in formulating the economic policies that are best suited for it.

• To regulate monetary policies and interest rates, the Central Bank requires the statistical analysis of National income, which it can easily get with the help of the Calculation of National income.

• It assists the government in the formulation and modification of national policies regarding national infrastructure and tax reforms.

Utilisations of Calculation of National Income Accounting

• It reflects the monetary exhibition of an economy and shows its assets and liabilities.

• It assists with deciding the immediate changes that are showing up in the economy.

• It shows the commitment of every area towards the development of the economy.

Gross Domestic Product (GDP)

The main measurement of  Calculation of National Income Accounting is GDP or the total national output. Gross domestic product is characterised as the complete financial or the market worth of the multitude of definite labour and products that are delivered inside the geological limits of a country.

Gross domestic product functions as a scorecard that reflects the monetary wellbeing of a country. It is determined annually. The gross domestic product helps in assessing the development pace of a country. The gross domestic product can be determined utilising the three techniques, which are Product method (Value added),  Income method and Expenditure method.

GDP = C + I + G

C = Consumption expenditure

G = Government expenditure

I = Investment expenditure

Gross National Product (GNP)

Gross national product or GNP is the summation of the expenditure by  consumption, investment expenditure and government expenditure excluding Net factor income from abroad.

It implies how much a nation’s residents are adding to the economy. It does exclude revenues earned by foreign nationals residing in the country.

GNP = GDP – Z

Z = Net factor income from abroad = X-M

where, 

X = income of the people of a country who are living outside of the Country

M = income of the foreigners in a country

Net National Product (NNP)

Net national product (NNP) is the monetary value of finished goods and services produced by a country’s citizens, overseas and domestically, in a given period. It is represented as follows:

NNP = GNP – Depreciation

Conclusion

National income accounting helps in facilitating and formulating techniques and policies with best interest for the economy. It helps in measuring the input and output of production and aggregate annual income to lay out a clear picture that states the Economical condition of our Nation. It utilises the principle of double accounting system for the preparation of National Income accounting. National income accounting helps in summarising the economic performance of a country by measuring the national income aggregates for the year. The government policies are framed on the basis of the data obtained from national income accounting.