National Income Accounting (Statistics)

Louis Nkengakah

3 years ago

This National Income Accounting (Statistics) lesson notes is for students of the class of upper sixth.

This topic basically is concerned with how national income which is one of the main macro-economic aggregates is measured and a few related issues.

What is national income?

National Income (N.I) refers to the total money value of the goods and services produced by a country’s resources over a given period of usually a year.

Whereas, National income accounting refers to a government bookkeeping system that measures a country’s economic activity—offering insight into how an economy is performing. Such a system will include total revenues by domestic corporations, wages paid, and sales and income tax data for companies.

National Income accounting identity can be represented as follows;

National Income ≡ National Output ≡ National Expenditure

From the above, we have to understand that calculating N.I comes back to either taking the sum of incomes or sum of outputs or expenditures with a few adjustments along the way in each situation.

In short, a good mastery of this topic should lead us to be able to;

Calculate N.I by the three traditional methods and master the problems related to each method of calculation as well as the general problems involved.
Discuss the importance of N.I statistics as well as the limitations.
Distinguish between real and money National Income and how to estimate each of them.
Differentiate between N.I and Social Welfare or the standard of living in a country or between countries.
Explain how the concepts of Gross National Product (GNP), Net National Product (NNP), National Product or National Income, personal income, disposable income, etc can be derived from Gross Domestic Product (GDP).

Basic relationships

Calculating National Income

Using the Expenditure Method

The expenditure method is a system for calculating gross domestic product (GDP) that combines consumption, investment, government spending, and net exports. It is the most common way to estimate GDP. It says everything that the private sector, including consumers and private firms, and government spend within the borders of a particular country, must add up to the total value of all finished goods and services produced over a certain period of time. This method produces nominal GDP, which must then be adjusted for inflation to result in the real GDP.

TDE_MP + X = TFE_MP – M = GDP_MP – T + S = GDP_fc + NPIA = GNP_fc – Dep = NNP_fc or N.I

TDE = Total domestic expenditure which is made of consumers expenditure(C);

General government final expenditure (G) and investment on gross domestic capital formation including changes in stocks and work in progress (I).

Therefore, it follows that,

TDE = C + I + G

NB: It should be noted that investment is defined to include gross domestic capital formation and changes in stocks.

X = Exports of goods and services

TFE = Total final expenditure

M = Imports of goods and services

GDP_mp = Gross Domestic Product at market prices

T = Expenditure taxes or indirect taxes

S = Subsidies

GDP_fc = Gross domestic product at factor cost

NPIA = Net property income abroad or the difference between income received from abroad and income paid abroad.

Dep or C.C = Depreciation or Capital consumption

NNP_fc = Net national product at factor cost or N.I

NB: The operations must not be strictly followed this order because addition and subtraction are commutative. It suffices to know that each operation has significance. For instance, in so far as adjustments are not made for taxes and subsidies, all values remain at the market price.

The Gross Domestic Product at market price is given as;

GDP_mp = TDE_mp + X – M

The Income Method

The Income Method measures national income from the side of payments made to the primary factors of production in the form of rent, wages, interest, and profit for their productive services in an accounting year.

Thus, national income is calculated by adding up factor incomes generated by all the producing units located within the domestic economy during a period of account.

From the above explanations, we have;

TDI – Stock app + Stock dep ± R.E = GDP_fc + NPIA = GDP_fc – Dep or C.C = N.I

TDI = Total domestic income which is obtained by adding up;

Income from employment
Self-employment income
rents
Gross trading profits of companies
Interest
Gross trading surpluses
An imputed value for the consumption of non-traded capital

The output method of calculating national income

The output or product method is based on returns made by firms and public corporations concerning the annual value of their output. In most countries these returns are obtained through the census of production.

National income is measured by the output method by calculating the total value of goods and services produced in the country during the year.

GDP_fc + NPIA = GNP_fc – Dep or C.C = NNP_fc or N.I

Here, GDP_fc is obtained by adding up the outputs of the various sectors of the economy. We take either the values added at each stage of production or the values of the final outputs.

We then include an imputed value for the ownership of dwelling, subtract an adjustment for financial services and adjust for residual error if need be so.

General observations

Only in the expenditure method do we have values initially at market prices. The output and income methods give values directly at factor cost except otherwise stated.
The elements for each method are somewhat peculiar and a lot of patience is needed to make the distinctions. Foe example, the R.E is only present in the output method and income method.

Some important N.I accounting relations

1) GNP = GDP + NPIA

⇒ GDP = GNP – NPIA

⇒ NPIA = GNP – GDP

NB: It does not matter whether GNP is at market price or factor cost.

2) NNP = GNP – Dep

⇒ GNP = NNP + Dep

⇒ Dep = GNP – NNP

3) Gross Investment (G.I) = Net Investment (NetI) + Dep

Net investment is the total amount of money that a company spends on capital assets, minus the cost of the depreciation of those assets. This figure provides a sense of the real expenditure on durable goods such as plants, equipment, and software that are being used in the company’s operations.

4) F.c = M.p – T + S , Where F.c is the Factor cost and M.p is the market price.

⇒ M.p = F.c +T – S

⇒ T = M.p – F.c + S

⇒ S = F.c – M.p + T