- National income of a country is the sum of income earned by its residents from the factor services rendered to the production units both within and outside the geographical boundaries of the country.
- The term ‘National’ here refers to residents whose economic interest lies in the country in which they live, and the term ‘income’ refers to ‘factor income’.
- Factor Income is the income derived from factors of production such as Land, Labour, Capital and Entrepreneurship.
Accounting of National Income
- National income accounting is the set of statistical principles and methods used to measure the overall economic activities of the nation.
- It is basically a bookkeeping system that a government uses to measure the level of the country’s economic activity in a given time period.
- While accounting for National Income (NI), only the income earned by the residents is taken into account, irrespective of their economic territory. It may be within or outside the economic territory, i.e., we must see whether the income is generated by residents or non-residents.
Income generated by SBI from its business operations in New York (U.S.A.)
- Here, SBI is an Indian resident company. Since the income generated from its business operations in New York (U.S.A.) which is another economic territory (outside India or outside economic territory), is accounted for in the Indian National Income.
Income generated by Google from its business operations in India
- Here, Google is a non-resident company in India. Since the income is generated by the non-Resident, it is not accounted in the Indian National Account.
- The tools used for national income accounting are – Gross Domestic Product (GDP), Gross National Product (GNP), Gross National Income (GNI), etc.
Significance of National Income Accounting
- It helps in comparing estimates, forecasting growth, and policy formulation for the future.
- It helps in comparing economies around the world.
- It is helpful in effective decision-making on investments, thereby helping business houses to plan for productions.
- The data of national income accounting gives very useful insight regarding the level of income (income inequality) of the masses, living standard, comparison between the different sectors of the economy and their contribution to national GDP.
Limitations of National Income Accounting
- It only accounts for paid activities.
- A rise in national income may not mean a rise in living standards.
- It does not capture the black economy. Moreover, the black economy distorts the accounting figures.
- While making a comparison with past economic growth, adjustments have to be made to allow for inflation. Hence it is important when looking at the figures to see whether they are in nominal terms, i.e., the actual figures not adjusted to remove the effects of inflation.