national income accounting

Topics: Gross domestic product, Measures of national income and output, Economics Pages: 7 (1952 words) Published: November 13, 2013
National Income
National income is a sum of incomes received in a year by a nation’s factors of production for their contributions to economic activity; or a sum of wages and salaries, interest, rent, and profit received during a year by a nation’s factor of production. It excludes gifts, consumer debt, grants and benefits received without engaging in any productive or economic activity.

National income accounting refers to the set of rules and techniques of measuring the income of the economy. It explains the process by which a country ascertains its total flow of output and inputs. Certain concepts of the national income include the gross domestic product, net factor income from Abroad, gross national product, depreciation etc.

The size of the national income is determined by the factors that affect the level of production in a country. The higher the level of production or output, the higher the national income. Some of these factors are discussed below:

Quantity and quality of the production resources: The level of production in a country is influenced by the availability of land, labour, capital and entrepreneurship. All other things being equal, the greater the quantity and quality of the factors of production, the higher the level of productivity and national income, if the factors of production are scarce or very inefficient, productivity will tend to be low which will result in low national income.

State of technical knowledge: The extent to which available manpower and technical skills is developed affects the level of output and income. A country with high level of technology generally has high degree of productivity and high national income.

Natural factors such as the weather could affect the level of production and national income. This is especially true of a country which is predominantly agriculture. Favourable weather helps to increase the level of production resulting in increase in national income. Adverse weather on the hand will reduce production and have negative effect on the national income.

Level of infrastructural development: The availability of good infrastructural facilities such as electricity, water supply, roads and transportation etc, help to increase productivity and resulting to increase in national income.

Government must know how the economy is performing in order to decide when, what, how much stimulus or constraints should be applied. That is, policy-makers need a statistical knowledge of the nation’s performance. This national income accounting is an important concept analyzing the performance of the economy.

Measurement of National Income Accounting
There are three main approaches to the measurement of the level of national income in an economy namely: Output approach
Income approach
Expenditure approach

The Output or Product Approach / Value Added Method
This approach involves or measures the (sale) money value of all goods and services (product) by firms and other organizations in the economy. This approach involves the summation of the value added at each stage of the production by all the firms and major sectors (primary, secondary and tertiary) at the economy such as agriculture, industry, mining and services. This approach is also termed as value added approach because it considers only the contribution by the key sectors of the economy towards the national product. Thus value added may be defined as the difference between the selling price of a product and the cost price of the product. This approach is to help avoid the problem of double counting. Here all unfinished or intermediate goods and services are ignored. With this approach the contribution or output of all individuals (C) business or corporate bodies (I), Government (G) are added up to the output sold abroad or export (X) and imported product (M) deducted to arrive at the domestic product. Indirect taxes are subtracted and subsidies are added to arrive at GNP at factors...
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