National Income Accounting
National income accounting is the system used to measure a country's total economic activity over a year. It gives us vital statistics like GDP, GNP, NNP, and National Income — all interconnected measures.
Key Aggregates and Definitions
Gross Domestic Product (GDP): Market value of all final goods and services produced within the domestic territory of a country during an accounting year. "Final" means goods for ultimate use, not raw materials used in further production (to avoid double counting).
Gross National Product (GNP): GDP plus Net Factor Income from Abroad (NFIA).
GNP = GDP + NFIA
NFIA = Factor income earned by residents abroad - Factor income paid to non-residents in the country.
Net National Product (NNP): GNP minus depreciation (Consumption of Fixed Capital).
NNP = GNP - Depreciation
National Income (NI) = NNP at Factor Cost: NNP at market prices minus Net Indirect Taxes.
NI = NNPMP - Net Indirect Taxes
Net Indirect Taxes = Indirect Taxes - Subsidies
Personal Income and Disposable Income:
Personal Income = NI - Retained Earnings - Corporate Tax + Transfer Payments
Disposable Income = Personal Income - Personal Taxes
Three Methods of Measuring National Income
1. Value Added Method (Product Method):
Sum of value added by all producing units in the economy.
Value Added = Value of Output - Value of Intermediate Inputs
GDPMP = Sum of GVA of all sectors
2. Income Method:
Sum of all factor payments: wages, rent, interest, and profit.
NI = Compensation of Employees + Rent + Interest + Profit + Mixed Income
3. Expenditure Method:
GDPMP = C + I + G + (X - M)
where C = Private Final Consumption, I = Gross Investment, G = Government Final Consumption, X = Exports, M = Imports.
Avoiding double counting
Wheat worth Rs. 100 is sold to a flour mill. The mill adds value and sells flour for Rs. 150 to a bakery. The bakery sells bread for Rs. 200. GDP counts only the final value: Rs. 200. Or sum of value added: 100 + 50 + 50 = Rs. 200. Both give the same answer.
GDP to GNP conversion
Suppose GDP = Rs. 1,00,000 crore. Indians working abroad send home factor income worth Rs. 5,000 crore. Foreign workers in India remit Rs. 2,000 crore abroad. NFIA = 5,000 - 2,000 = Rs. 3,000 crore. GNP = 1,00,000 + 3,000 = Rs. 1,03,000 crore.
NNP and depreciation
GNP = Rs. 1,03,000 crore. Capital goods worth Rs. 8,000 crore wore out during the year (depreciation). NNPMP = 1,03,000 - 8,000 = Rs. 95,000 crore.
Market price to factor cost
NNPMP = Rs. 95,000 crore. Government collected Rs. 5,000 crore as indirect taxes and paid Rs. 1,000 crore as subsidies. Net Indirect Taxes = 5,000 - 1,000 = 4,000 crore. NNPFC = National Income = 95,000 - 4,000 = Rs. 91,000 crore.
Expenditure method
A small economy: C = Rs. 600 crore, I = Rs. 150 crore, G = Rs. 100 crore, X = Rs. 80 crore, M = Rs. 60 crore. GDPMP = 600 + 150 + 100 + (80 - 60) = Rs. 870 crore.
Income method
Compensation of employees = Rs. 400 crore, Rent = Rs. 80 crore, Interest = Rs. 70 crore, Profit = Rs. 100 crore, Mixed income = Rs. 150 crore. NI = 400 + 80 + 70 + 100 + 150 = Rs. 800 crore.
Real vs Nominal GDP
Nominal GDP in Year 1 = Rs. 1,000 crore (base year). Nominal GDP in Year 2 = Rs. 1,200 crore. Price index in Year 2 = 110. Real GDP Year 2 = (1200 / 110) x 100 = Rs. 1,090.9 crore. The economy grew in real terms by about 9%, not 20%.
Common mistakes
- Do not include intermediate goods in GDP — this causes double counting.
- Depreciation is subtracted to go from Gross to Net (GNP to NNP).
- Indirect taxes are subtracted and subsidies are added when converting from Market Price to Factor Cost.
- Transfer payments (pensions, scholarships) are NOT included in GDP — no production occurs.
- Stock and share transactions are NOT included — they are not current production.
Summary
National Income Accounting measures economic activity using GDP, GNP, NNP, and NI. Three methods — value added, income, and expenditure — all give the same result when correctly applied. Moving from GDP to NI involves adding NFIA, subtracting depreciation, and subtracting net indirect taxes. Real GDP adjusts for inflation and better reflects actual growth.