National Income Accounting

Based on this concept, the aggregate value of goods and services can be calculated through various ways. 

Methods to Calculate Aggregate Value of Production:

There are three methods to calculate the said value, that is: Product or Value-Added Method, Expenditure Method and Income Method. 

The Product Method:

• It is also known as a value-added method
• This method is used to calculate the aggregate value of goods and services produced by all the firms in an economy during a financial year
• To calculate the aggregate value of production, the value of intermediate goods is subtracted from the value of production of the firm

Value Added by a firm = The Value of production of the firm – the Value of intermediate goods 

• Value of aggregate amount of goods and services produced by the economy can be measured by summing the gross value added of all the firms in an economy during a year and the value so obtained is the Gross Value Added (GVA)

• If Depreciation is reduced from GVA to account for the normal wear and tear of the Capital Factors of Production, it is said as Net Value Added (NVA)

Expenditure Method:

• It is an alternative method to calculate the GDP
• Under this method, the aggregate value of all goods and services produced in a year are calculated by looking at the expenditure made by different sectors
• In this method, the following expenditures are added

• The final consumption expenditure made by the firms on the goods and services produced by other firms
• The households, which undertake consumption expenditure on various goods and services
• The final investment expenditure, which is sustained by other firms on the capital goods produced by a firm
• The expenditure (both consumption and investment) incurred by the government on the final goods and services produced by the firm
• The export revenues that the firms earn by selling their goods and services abroad

Income Method:

• The sum of final expenditures in the economy should equal the total of revenues received by all factors of production combined (final expenditure is the spending on final goods, excluding spending on intermediate goods)

• Revenues gained by enterprises must be dispersed among the elements of production (land, labour, capital, and entrepreneurship) in the form of salaries, wages, profits, interest earnings, and rents
• As a result, GDP is calculated using this approach by adding salaries, wages, profits, interest earnings, and rents

The Importance of Accounting for National Income

• National income accounting statistics can also be used to simplify the methods and techniques used to measure an economy’s aggregate intake and output
• The information given is utilised to shape government economic policies, and it also aids in identifying systemic changes in the economy
• Accounting for national income offers information on the trend of economic activity levels. Data can explain a wide range of social and economic events, assisting policymakers in developing more effective economic policies
• The national income accounting information can be used by central banks to change interest rates and formulate or update monetary policy
• The statistics on GDP, investments, and expenditures also assists the government in developing or revising policies on infrastructure spending and tax rates
• The national income accounting data also illustrates the relative contribution of various industries to economic development

Conclusion

National income accounting is a double-entry accounting method used by governments to monitor the condition of a country’s economy. There are three approaches to calculating national income: the value-added method, the income approach, and the expenditure approach. They may be used in conjunction, depending on the income class and industry. National income accounting statistics may be used by the government to determine or amend economic policies, interest rates, and monetary policy.