National Income Accounting | CBCS

National Income and product accounts –

Data collected and published by Govt. describing the various components of National Income and output in economy.

Gross Domestic Product –

It is the total market value of a country’s output. It is market value of all final goods and services produced within a given period of time by factors of production located within a country.

Intermediate goods : Goods that are processed by one firm for use in further processing by another firm. Value of intermediate goods is not counted in GDP.

So, here comes question why are intermediate goods not counted in GDP?

Let’s get started,

Suppose that in producing a Car, General Motors (GM) pays  Rs.200 to Goodyear for tires. GM uses these tires to assemble a car, which it sells for Rs. 24,000. The value of car(including tires) is Rs. 24,000 not (Rs.24,000 + Rs. 200). The final price of the car already reflects the value of its components. To count in GDP both the value of tires would result in Double Counting.

Double Counting can be avoided by counting only value added to product by each firm in its production process.

Value Added– Difference between value of goods as they leave stage of production and cost of goods  as they entered that stage.

Have You Read?

Components Of Macroeconomics

Gross National Product( GNP) –

The total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced.

Calculating GDP : 

1) Expenditure Approach  : A method of computing GDP that measures the total amount spent on all final goods and services during a given period.

 The four main groups in the economy:

Households, firms, the Government, and the rest of the world. 

The expenditure approach calculates GDP by adding together these four components of spending. It is shown here in equation form:

There are also four main categories of expenditure:

• Personal consumption expenditures (C): household spending on consumer goods

• Gross private domestic investment (I): spending by firms and households on new capital,

that is, plant, equipment, inventory, and new residential structures

•Government consumption and gross investment (G)

• Net exports (EX - IM): net spending by the rest of the world, or exports (EX) - imports (IM).

  

A)  Personal Consumption Expenditures (C)- The largest part of GDP consists of personal consumption expenditures (C). The amount of personal consumption expenditures accounted for 70.8 percent of GDP.

 These are expenditures by consumers on goods and services.

There are three main categories of consumer expenditures: durable goods, non durable goods, and services. 

• Durable goods, such as automobiles, furniture, and household appliances, last a relatively long time.durable goods expenditures accounted for 7.3 percent of GDP.
• Non durable goods, such as food, clothing, gasoline, and cigarettes, are used up fairly quickly. non durable for 15.6 percent.
• Payments for services—things we buy that do not involve the production of physical items—include expenditures for doctors, lawyers, and educational institutions.services for 47.9 percent. Almost half of GDP is now service consumption. 

B)  Gross Private Domestic Investment (I) : Investment refers to the purchase of new capital—housing, plants. Total investment in capital by the private sector is called gross private domestic investment (I).

 

• Non Residential Investment: Expenditures by firms for machines, tools, plants, etc.
• Residential Investment: Expenditures by households and firms on new houses and apartment buildings.
• Change in Business Inventories :The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later. Increase in inventories is increase in capital. 

Have You Read?

 The Keynesian Theory of Consumption 

Gross Investment versus Net Investment

Depreciation: The amount by which an asset’s value falls in a given period.

 Gross Investment : The total value of all newly produced capital goods produced in a given period.

 Net Investment: Gross investment minus depreciation.It is a measure of how much the stock of capital changes during a period.Positive net

Investment means that the amount of new capital produced exceeds the amount that wears out, and negative net investment means that the amount of new capital produced is less than the amount that wears out.

C)  Government Consumption and Gross Investment (G) : Expenditures by federal, state, and local governments for final goods and services. . Federal government consumption and gross investment accounted for 8.0 percent of GDP, and state and local government consumption and gross investment accounted for 12.5 percent.

 Govt. transfer payments are not included.

 

D) Net Exports (EX - IM):It is the difference between exports(sales to foreigners) and imports (purchases of goods and services from abroad).

This figure can be positive or negative.

2) Income Approach : A method of computing GDP that measures the income—wages, rents, interest, and profits—received by all factors of production in producing final goods and services.

National Income: The total income earned by the factors of production owned by a country’s citizens.

 It is sum of eight items:

Compensation of Employee: Includes wages, salaries, and various supplements -employer contributions to social insurance and pension funds, for example-paid to households by firms and by the government.        

Proprietors’ Income: The income of unincorporated businesses.

Rental Income: The income received by property owners in the form of rent.

Corporate Profits : The income of corporations.

 Net Interest : The interest paid by business.

Indirect Taxes minus Subsidies: Taxes such as sales taxes, customs duties, and license fees less subsidies that the government pays for which it receives no goods or services in return.

Net business transfer payments: Net transfer payments by businesses to others.

Surplus of Government Enterprises : Income of government enterprises.

 

Net National Product (NNP): GNP minus depreciation; a nation’s total product minus what is required

to maintain the value of its capital stock.

 Statistical discrepancy: Data measurement error.

Personal Income : The total income of households, before they pay personal income taxes.

 Disposable personal income or after-tax income : (Personal income minus personal income taxes). The amount that households have to spend or save.

 Personal Saving: The amount of disposable income that is left after total personal spending in a given period.

 Personal Saving Rate: The percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.

Nominal versus Real GDP

Current Dollars: The current prices that we pay for goods and services.

 Nominal GDP: Gross domestic product measured in current dollars.

 Weight: The importance attached to an item within a group of items.

 

It is not a good measure of aggregate output over time. Why? Assume that there is only

one good—say, pizza, which is the same quality year after year. In each year 1 and 2, 100 units

(slices) of pizza were produced. Production thus remained the same for year 1 and year 2.

Suppose the price of pizza increased from Rs.1.00 per slice in year 1 to Rs.1.10 per slice in year 2.

Nominal GDP in year 1 is Rs.100 (100*Rs.1), and nominal GDP in year 2 is

Rs.110 (100 * Rs.1.10). Nominal GDP has increased by Rs.10 even though no more

slices of pizza were produced.

 If we use nominal GDP to measure growth, we can be misled into thinking production has grown when all that has really happened is a rise in the price level (inflation).

Calculating Real GDP:

 Real GDP-  Production of goods and services valued at constant prices.

 Real GDP= Price * Quantity

Base Year- The year chosen for the weights in a fixed- weight procedure.

 Fixed-weight procedure - A procedure that uses weights from a given base year.

 

Calculating the GDP Deflator : 

It is the measure of price level calculated as ratio of nominal GDP to real GDP times 100.

Calculating Real and nominal GDP :

Nominal GDP : 

2010: Price of Pizza* Quantity of Pizza + Price of Burger*Quantity of Burger

            = 1*100 + 2*50 

            = 200

2011: 2*150 + 3*100 = 600

2012: 3*200 + 4*150 = 1,200

Real GDP :

2010 as base year( price of base year)

2010: 1*100 + 2*50 = 200

2011: 1*150 + 2*100 = 350

2012: 1*200 + 2*150 = 500

GDP Deflator :

2010: Nominal GDP / Real GDP * 100 

           = 200/ 200* 100

           = 100

2011: 600/ 350 * 100 = 171.42

2012: 1,200/ 500 * 100 = 240

Limitations Of GDP:

1) GDP and Social Welfare- If crime levels went down, society would be better off, but a decrease in crime is not an increase in output and is not reflected in GDP. Most non market and domestic activities, such as housework and child care, are not counted in GDP even though they amount to real production. The salaries of day care staff, cleaning people are counted in GDP, but the time housewife spend doing the same things is not counted. A mere change of institutional arrangements, even though no more output is being produced, can show up as a change in GDP. 

GDP accounting rules do not adjust for production that pollutes the environment. The more production there is, the larger the GDP, regardless of how much pollution results in the process. GDP also has nothing to say about the distribution of output among individuals in a society. We cannot use GDP to measure

the effects of re distributive policies. Such policies have no direct impact on GDP. GDP is also neutral about the kinds of goods an economy produces. Symphony performances, handguns, cigarettes, professional football games,

Bibles, soda pop, milk, economics textbooks, and comic books all get counted similarly

2) The Underground Economy : The part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP. 

Tax evasion is usually thought to be the major incentive for people to participate in the underground economy. Studies estimate that the size of the U.S. underground economy, ranging from 5 percent to 30 percent of GDP, is comparable to the size of the underground economy in most European countries and probably much smaller than the size of the underground economy in the Eastern European countries. 

To the extent that GDP reflects only a part of economic activity instead of a complete measure of what the economy produces, it is misleading. Unemployment rates, for example, may be lower than officially measured if people work in the underground economy without reporting this fact to the government.

3) Gross National Income (GNI) : Since exchange rates can change quite dramatically in short periods of time, such conversions are tricky. Recently, the World Bank adopted a new measuring system for international comparisons.

GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation.

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