MEASURING THE NATIONAL INCOME ACCOUNT

What is national income account?

-National Income defines a country’s wealth. This income depicts the value of

goods and services which are produced by an economy. This gives effect to the

net result of all the economic activities performed in the country.Imagine how

you would define a country’s wealth without any economic term? In that case,

there would be no accountability and responsibility linked with the production

in the country. The resources would go uncalculated and there would be a

vague economic atmosphere. Thus, let us indulge in this study which talks

about National Income.

-National income is the sum total of the value of all the goods and services

manufactured by the residents of the country, in a year., within its domestic

boundaries or outside. It is the net amount of income of the citizens by

production in a year. To be more precise, national income is the accumulated

money value of all final goods and services produced in a country during one

financial year. Computation of National Income is very vital as it indicates the

overall health of our economy for that particular year.

The definition of National Income if of two types-

Traditional Definition of National Income

Modern Definition:
Traditional Definition of National Income-According to Marshall: “The labor and

capital of a country acting on its natural resources produce annually a certain

net aggregate of commodities, material and immaterial including services of all

kinds. This is the true net annual income or revenue of the country or national

dividend.”

Modern Definition

This definition has two subparts

GDP-Gross Domestic Product, abbreviated as GDP, is the aggregate value of

goods and services produced in a country. GDP is calculated over regular time

intervals, such as a quarter or a year. GDP as an economic indicator is used

worldwide to measure the growth of countries economy.

Constituents of GDP

Wages and salaries

Rent

Interest

Undistributed profits

Mixed-income

Direct taxes

Dividend Depreciation

The Formula for Calculation of GDP

GDP = consumption + investment + government spending + exports – imports.

For example, let’s use the expenditure approach to calculate GDP for a fictional

country called Econoland. We will consider the following components:

1. Consumer Spending ©: $500 billion

2. Investment Spending (1): $200 billion

3. Government Spending (G): $150 billion

4. Net Exports (Exports – Imports) (NX): $50 billion

Using the expenditure approach, we can calculate GDP as follows:

GDP = C + I + G + NX

GDP = $500 billion + $200 billion + $150 billion + $50 Billion

GDP = $900 billion

Therefore, the GDP of Econoland using the expenditure approach is $900

billion

GNP-Gross National Product (GNP) is an estimated value of all goods and

services produced by a country’s residents and businesses. GNP does not

include the services used to produce manufactured goods because its value is

included in the price of the finished product. It also includes net income arising

in a country from abroad.

•Components of GNP
•Consumer goods and services

•Gross private domestic income

•Goods produced or services rendered

•Income arising from abroad.

Formula to Calculate GNP

GNP = GDP + NR (Net income from assets abroad or Net Income Receipts) – NP

(Net payment outflow to foreign assets).

Let’s consider a simplified example for a fictional country called Econoland:

1. Gross Domestic Product (GDP): $800 billion

2. Net income earned by foreign residents in Econoland: $50 billion

3. Net income earned by Econoland residents abroad: $20 billion

GNP can be calculated as follows:

GNP = GDP + Net income earned by foreign residents in Econoland – Net

income earned by Econoland residents abroad

GNP = $800 billion + $50 billion - $20 billion GNP = $830 billion

Therefore, the Gross National Product (GNP) of Econoland is $830 billion.

What are the 4 main components of GDP?

There are four main components of GDP; consumption, investment,

government spending, and exports. Consumption is the largest component of

GDP and is a measure of all spending by households on goods and services.

Personal Consumption – Accordingly, GDP is defined by the following formula:

GDP = Consumption + Investment + Government Spending + Net Exports or

more succinctly as GDP = C + I + G + NX where consumption © represents

private-consumption expenditures by households and nonprofit organizations,

investment (I) refers to business expenditures …

- Refers to personal or consumer expenditures. In other words, it measures

the dollar value of goods and services purchased by consumers. These

items would include food, clothing, and landscaping services. Any new

purchases by consumers can be counted as part of the GDP.

Example: Food, Electricity Bill, Phone Bills, Rent Bus Fares and so on.

Investment – In calculating GDP, investment does not refer to the purchase of

stocks and bonds or the trading of financial assets. It refers to the purchase of
new capital goods, that is, business equipment, new commercial real estate

(such as buildings, factories, and stores), residential housing, and inventories.

- Investment refers to private domestic investment or capital expenditures.

Businesses spend money to invest in their business activities. For

example, a business may buy machinery. Business investment is a critical

component of GDP since it increases the productive capacity of an

economy and boosts employment.

Example: Bonds, Stock, Commodities, Real Estate, Market Expansion, Funds

and so on.

Government spending -Spending Trends Over Time and the U.S. Economy

The federal government spent $6.13 trillion in FY 2022. This means federal

spending was equal to 23% of the total gross domestic product (GDP), or

economic activity, of the United States that year.

Example: Education, Health-care, Social Protection Defense so on.

Net expert – Net export is the difference between the value of a country’s

exports versus its imports. The net export value can be either positive (trade

surplus) or negative (trade deficit). The net export variable is used to compute

the GDP of a country.

-The estimates of net exports are an integral part of the NIPAs, a set of

accounts that provides a logical and consistent framework for presenting

statistics on U.S. economic activity.

Net exports can be calculated by subtracting the value of a country’s total

imports from the value of its total exports. The formula for calculating net

exports is:

Net Exports = Total Exports – Total Imports

Let’s consider a specific example to calculate net exports.

Assume that Country A exports goods and services worth $500 billion and

imports goods and services worth $400 billion in a given year.

To calculate the net exports of Country A, we use the formula:

Net Exports = Total Exports – Total Imports Net Exports = $500 billion - $400

billion Net Exports = $100 billion

In this example, Country A has a net export of $100 billion. This means that

Country A exported $100 billion more in goods and services than it imported in

that particular year.

Similarities of four major components in GDP

One similarity among these components is that they all contribute to the

overall GDP of a country. Consumption represents the spending by households

on goods and services, investment reflects spending by businesses on capital

goods and structures, government spending includes expenditures on goods

and services by the government, and net exports represent the difference

between a country’s exports and imports.

Additionally, all four components are influenced by factors such as economic

conditions, government policies, and consumer confidence. Changes in these

factors can impact the level of spending in each component and therefore affect

overall GDP growth and stability.

Overall, while each component plays a unique role in the composition of GDP,

they are all interconnected and contribute to the overall economic performance

of a country.

Why an Economy’s total income equals its total expenditure

An economy's income must equal its expenditure because there is a

purchaser and a seller on each exchange. Therefore, the buyers' spending

would equal the sellers' revenue. Each dollar in spending becomes one dollar of

revenue.

A balanced budget (particularly that of a family) refers to a budget in

which income is equal to its expenditures. Thus, neither a budget deficit nor a

budget surplus exists (it accounts "balance").

How Gross Domestic Product (GDP) is defined and calculated

Gross domestic product (GDP), total market value of the goods and

services produced by a country’s economy during a specified period of time. It

includes all final goods and services—that is, those that are produced by the
economic agents located in that country regardless of their ownership and that

are not resold in any form. It is used throughout the world as the main

measure of output and economic activity.

In economics, the final users of goods and services are divided into three

main groups: households, businesses, and the government. One way gross

domestic product (GDP) is calculated—known as the expenditure approach—is

by adding the expenditures made by those three groups of users.

Calculation

GDP = C + I + G + NX

Where:

C= consumption

I=investment

G= government spending

NX= net exports

The breakdown of GDP into its four major components

The four components of gross domestic product are personal

consumption, business investment, government spending, and net exports.

There are four main aggregate expenditures that go into calculating

GDP: consumption by households, investment by businesses, government

spending on goods and services, and net exports, which are equal to exports

minus imports of goods and services.