Macro Economics

National Income Accounting

Like accounting mean for bookkeeping, posting, recording and reporting the facts of the business/ economic transaction, in macro economics national income accounting does the same. The flow of goods and services in a nation over a annual (normally) period of time is the area national income accounting responsible for. National income accounting is the calculation of national income in monetary term of all goods and services produced by a nation during one year after deducting the depreciation value of the machines used in production.

one important point, national income of a country is its annual consumption and not units of annual production. The two basic ways of measuring national economic activity are:

a) From the money value of the total production of goods and services during a year time, or

b) From the total of incomes derived from economic activity after allowance has been made for capital consumption.

Now you may have question after reading this, why a country have to go through it? Now, the reasons are:

a)Assessing the current standard of living of the citizens of a country

b)Distribution of income within a population

c)Comparison of changes within a nation (assessing current data with previous years)

d)Comparison of progress/loss made or encountered within different dimensions of national economic indicators.

e)This examines the economic health of nation

f)To get insights on whether an economy is expanding? Is the economy stagnated? or, Is the economy in recession?

To the point, national income accounting is the process to achieve national income. Hence, they are used interchangeably in economics.

(Source of image is internet)

Basic/Main concepts of National Income and Output

1. Gross Domestic Product (GDP):  The total monetary value of all ultimate/final goods and services produced within a territory of nation in a given time period (usually, a year) is known as GDP. The GDP of Nepal in fiscal year 2075/76 is Rs. 34.6 arba.

2. Net Domestic Product (NDP): There is slight difference between GDP and NDP. NDP is equal to GDP minus depreciation on capital goods ( capital consumption allowance or consumption of fixed capital). 

3. Gross National Product (GNP)/Gross National Income (GNI): GNP/GNI is equal to GDP plus net factor income from abroad. The term net factor of income from abroad (NFIA) means the monetary calculation received after subtracting factor payments to abroad from factor received from abroad. When the term NFIA comes one must understand, it can be positive, negative or zero. To be more clear,

a)Positive NIFA is when the factor received from abroad is higher than factor payments to abroad.

b)Negative NFIA is when factor payments to abroad is higher than factor received from abroad. 

c)Zero NFIA is when the both facor payments and received are equal with one another.

You may confuse with the word factor, what it includes? It includes,

a)Compensation of employees

b)Income in the form of rent, interest and dividend

c)Retained earnings, earnings which is retained after payment of corporate tax and dividend

now, the net factor income is gained after subtracting the amount received by nationals and paid to residents of foreigners

4. Net National Product (NNP): The market value of the net output of goods and services produced by nation in a year is called net national product. It is achieved after subtracting depreciation of physical capital from gross national product.

5. National Income (NI): It is sum income earned by the nationals of a country over a given span of time by being employed within country and abroad.

6. Personal Income (PI): The income that is actually received by individuals and household in an economy in a year. Following cost have to be deducted from national income to get the personal income:

a)Corporate income taxes

b)Retained earning (undistributed profit)

c)Social security/contributions

d)Insurance premium 

In above point social security contribution, corporate profit tax and retained earnings are earned amount but not receivable income. But, transfer payments made by the government is received income but not a earned income.

7. Disposable personal income (DPI): It is the personal income left after the payment of direct personal taxes to the government.

Happy reading!