National Income: Accounting, Importance and Treatment With Example

GDP is defined as the total monetary or the market value of all the final goods and services that are produced within the geographical boundaries of a country. Combined with population data, national income accounts can provide a measure of well-being through per capita income and its growth over time. Combined with financial and monetary data, NIAs provide a guide to inflation policy. NIAs provide the basis for evaluating government policy and can rationalize political challenges to incumbents by people who are dissatisfied with measurable aspects of the government’s policies. In emerging and transition economies, implementing a dependable and accurate system of NIAs is a crucial step in developing economic policy.

  1. Deflation is when the economy takes a dive and declines over a period.
  2. This means that GNP provides a more comprehensive picture of a country’s economic output and its citizens’ standard of living than GDP alone.
  3. Because the data cannot easily be faked, autocrats are loathe to publish their countries’ NIAs and either proscribe or delay their release.
  4. The income that individuals have to spend or save after payment of personal taxes is called personal disposable income.

For example, if the GDP of a country is $1 trillion and the depreciation of capital goods is $200 billion, then the NDP of the country would be $800 billion. The names of the measures consist of one of the words “Gross” or “Net”, followed by one of the words “National” or “Domestic”, followed by one of the words “Product”, “Income”, or “Expenditure”. Mixed-income refers to the earnings of self-employed workers such as farmers, doctors, and barbers and unincorporated businesses such as small retailers, repair shops, and retail traders.

National income provides information about economic progress, and whether the nation is progressing well on the path of development or not. Thirdly, we have also assumed that the economy neither imports nor exports goods/services; i.e., we have not taken into account the role of foreign trade. It may be added that the above description of the circular flow is very much simplified. Several assumptions have been made to make its analysis easy to understand.

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We can measure the increase or decrease in the standard of living of the people with the help of national income. Thus it measures the monetary value of the flow of output of final goods and services produced in an economy over a period of time. GDP is an annual calculation of the total number of goods and services produced by a country. It doesn’t depict the welfare of an economy as a rise in GDP does not mean a rise in the growth of all the people of a nation may have grown; others may have fallen. Also, GDP caters to monetary and nonmonetary situations, so it is not only about money.

National Income, Concept, Calculation Method, Formula, Importance

The GDP deflator is a measure of price changes in goods and services included in GDP and is an important indicator of inflation. The nominal GDP is the value of goods and services produced in a given year, measured in current (market) prices, while real GDP is adjusted for inflation by measuring production in constant prices of a base year. To adjust for inflation and get a more accurate representation of economic growth, real GDP is used.

In the expenditure method, the national income is measured by adding up the expenditures made by individuals, companies, and the government. Thus, it combines consumer spending, investments made by companies, net exports, and government spending to calculate the national income. National Income is an important topic for UPSC as it is a key indicator of the economic health of a country. It is a part of the UPSC Syllabus under the Economics subject and is covered in both UPSC Online Coaching and UPSC Mock Test.

National Disposable Income and Private Income

Sir Richard Stone is regarded as the father of national income accounting. He studied law at the University of Cambridge, but later under the influence of John Maynard Keynes decided to study Economics. This article helps the students in getting a better understanding of the concept of national income accounting. It’s imperative to recognize that national income does not encapsulate the entirety of earnings received by all citizens, but solely those incomes generated through active involvement in the production process.

National income data and other statistics help us to find out the contribution of a particular region in our total national product. The comparison between different regions will reflect the level of economic development and disparities importance of national income accounting between various regions. This circular flow of money continues indefinitely day by day, week by week and year by year. It may, however, be pointed out that this flow of money need not always continue at a steady level.

National Income Formula

Hence, when selecting the best sociology teacher, one must consider the usefulness of sociology optional coaching in General Studies, Essay, and Personality Test. Add personal dividend payments, the portion of corporate profits that is paid to individuals. Subtract all personal taxes such as employment (professional tax) taxes. These taxes are not paid out to individuals and, therefore, are not available for households to spend. Otherwise, output will fall because capital goods are the creators of other goods. However, if the economic life of a machine (such as oven) is less than one year the value of the oven purchased by a bakery is to be deducted from the value of bread to find out the net value of output produced by the bakery.

Most of the activities are not brought by money but by the barter system. In such conditions, the non-monetary transactions are not methods of national income and it results in the computation of national production on the lower side. We have studied that in the computation of national income only those commodities and services are included which are commercially used. In most the developing countries, people in rural areas do not incur many types of expenditure on the production of primary goods like villagers produce the required raw materials themselves.

In other words, it represents the value of a country’s production after accounting for depreciation. There are many uses of national income accounting, and the primary use is to monitor economic activity and economic growth. Other uses include helping officials with public policy creation, setting tax rates, comparing other industries or sectors in economy, and tracking trends in the economy. Arriving at a figure for the total production of goods and services in a large region like a country entails a large amount of data-collection and calculation.

This income comprises transfer payments such as grants and subsidies, pensions, unemployment compensation, etc. Therefore, we can calculate personal income by subtracting undistributed profits and corporation income tax from national income, and adding to its transfer payments. A discrepancy exists between the total income earned by individuals and total income received by individuals. Personal income includes wages, salaries, rental income, interest and dividends, and certain transfer payments from government and business. If we include the values of both intermediate and final goods in computing GDP, we face the problem of double counting.

The flour, for instance, was made for Rs. 60 worth of wheat that we had already counted. In fact, then, the flour producers added only Rs. 40 to the production process. Income and output are flow concepts; that is, they are measured over a span of time. Modern governments try to prepare their budgets within the framework of national income data and try to formulate anti-cyclical policies according to the facts revealed by the national income estimates. Even the taxation and borrowing policies are so framed as to avoid fluctuations in national income.






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