EDEN IAS

national income accounting

MEASURES OF NATIONAL INCOME ACCOUNTING (NIA)

Introduction to National Income Accounting:

In economics, a number of national income accounting and output metrics use to estimate the total amount of economic activity in a nation or region. These metrics include net national income accounting (NNI), GDP, GNP, adjusted national income (NNI adjusted for natural resource depletion – also called NNI at factor cost), and net national product (GDP). Everyone particularly interest in calculating the overall quantity of products and services generates by all economic sectors.

The border typically determine by citizenship or geography. It’s sometimes define by the nation’s total income and limits the items and services that includes. For example, certain metrics exclusively include products and services that trades for cash, leaving out things that barter, but other metrics might try to include barter commodities by assigning them a monetary value.

NATIONAL INCOME ACCOUNTING: BASIC CONCEPTS AND MACROECONOMIC AGGREGATES

  1. GDP & Basic concepts
  • GDP is the total market value of all the final goods and services produced within the domestic territory of a country during a given period, normally a year.
  • GDP growth rate is an important indicator of the economic performance of a country.
                                                       DOMESTIC TERRITORY

·       The concept of a ‘Domestic territory’ (Economic Territory), as used in national accounting has a special meaning and is much wider than the political frontiers of a country.

·       It includes:

ü  territory lying within the political/geographic frontiers of a country, including territorial waters and airspace.

ü  Ships and aircrafts owned and operated by the residents between two or more countries.

ü  Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of the country.

ü  Embassies, consulates, military establishments, scientific establishments (e.g. India’s research stations in Arctic & Antarctica) of the country located abroad.

·       Domestic territory excludes:

ü  Embassies, consulates and military establishments of foreign country located in the country.

ü  International organizations like United nations, WHO, etc. which are physically located within geographical boundaries of a country. Their offices form part of international territory.

 

NOTE- GDP, thus includes all final goods and services produce within the domestic territory of a country, irrespective of whether they produce resident or non-resident (foreigners).

A NORMAL RESIDENT IS A ONE OF NATIONAL INCOME ACCOUNTING::

  • Who ordinarily reside within the domestic territory of a country for a period greater than 1 year.
  • Whose center of economic interest lies in that country.
  • Can be an individual or an enterprise
  • Can be a national (citizen) or a non-national (foreigner).

POINT TO NOTE

  • It is not necessary that a normal resident is also a citizen of that country. He/she can be citizen of some other country.
  • For e.g. if an Indian citizen living in USA for more than a year and his/her economic interest lies in that country, he/she would be deem as the normal resident of USA, even as he/she continues to be an Indian citizen. They calls non-resident Indians (NRI’s)

NOMINAL GDP VS REAL GDP OF NATIONAL INCOME ACCOUNTING:

  • Nominal GDP is the value of all final goods and services produced by the economy in the current year expressed in the prices of the CURRENT YEAR (current prices).
  • Real GDP is an inflation adjusted-measure. It reflects the value of all final goods and services produced by an economy in current year expressed in prices of BASE YEAR (constant prices).
  • When comparing the GDP of two or more years, REAL GDP is used. This is because, by removing the effects of inflation the comparison of the different years focusses solely on real output (quantity of goods and services). Whereas nominal GDP focusses on value (quantity and prices both).
                                                         GDP DEFLATOR

·       GDP deflator is a measure of change in prices of all final goods and services produced in the current year in an economy. It is measure of general price inflation.

                                       GDP deflator = Nominal GDP *100

                                                                     Real GDP

·       Since GDP is an aggregate measure of production, being the sum of all final goods and services, GDP deflator is much broader and comprehensive measure than consumer price index (CPI) and wholesale price index (WPI).

·       Unlike WPI, GDP deflator also considers services produced in the economy.

·       Changes in consumption patterns or the introduction of new goods and services or structural transformation are automatically reflected in the GDP deflator, which is not the case with other inflation measures.

·       Ministry of statistics and program implementation (MOSPI) comes out with GDP deflator in national account statistics as price indices.

 GROSS VS NET CONCEPT OF NATIONAL INCOME ACCOUNTING:
  1. Depreciation refers to a reduction in the value of an asset over time, in particular due to wear and tear. It implies consumption of fixed capital.
  2. Depreciation is deducted from gross product to obtain net product.
  • Thus, GDP – depreciation = NDP
  1. Since Net National/domestic product is adjusted to account for depreciation, it is less than gross national/domestic product.

NATIONAL VS DOMESTIC CONCEPT

  • National income considers ‘WHO’ produces goods and services i.e. it focusses only on residents of a country, whether within the territorial boundary or
  • In other words, it does not consider ‘WHERE’ the production takes place as long as it is being produced by the resident.
  • Thus, GNP includes income that an Indian resident earns abroad, but it does not include the income earned by the foreign residents in India (Thus GNP does not include the income of NRI’s).
  • On the other hand, GDP is concerned with incomes generated domestically even by the foreigners. GDP ignores income received from abroad.
  • In order to arrive at national product, Net factor income from Abroad (NFIA) is added to domestic product.
  • Thus, GNP = GDP + NFIA (net factor income from abroad).

Where NFIA = Incomes earned by a country’s residents abroad – Incomes earned by non-residents within the country.

IN SUMMARY (case of India)

  • GNP = market value of domestically produced final goods and services + incomes earned by the Indian residents in foreign countries – incomes earned in non-residents within India.
  • GDP = market value of final goods and services produced in the country + incomes earned by the non-residents within India – incomes received by Indian residents from abroad.
Factor cost vs Market price concept of National Income Accounting:
  • Factor cost refers to actual cost of various factors of production (i.e. factor payments like Rent, interest, profit and wages). It includes government grants and subsidies.
  • Market price refers to actual transacted price in the market. It includes indirect taxes imposed by the government and exclude subsidies.
  • Thus,
  • GDP at market price = GDP at factor cost – subsidies + Indirect taxes.
  • GDP at factor cost = GDP at market price + subsidies – indirect taxes
  • Net indirect taxes = Indirect taxes – subsidies
  • Net indirect taxes are added to the factor cost to arrive at the market price. This is because taxes tend to raise the market price whereas subsidies tend to reduce the market price of the goods.
  • POINT TO NOTE-
  • In its revision in January 2015, the central statistics office (CSO) replaced GDP at factor cost with the GVA at basic prices, and the GDP at market prices.
  • National Income = NNP (FC)

Sources- NCERT, Wikipedia