Simple Ways To Know National Income Accounting (Macro Economics)

NIA, a unit of 10 marks studies the state of economy with respect to economic activities during a period of one financial year. It critically evaluates the students on their understanding of economic concepts in relation to their implementation in solving the numerical problems. 

Let’s understand the ways to crack National income concepts:

1.    Final Goods and Intermediate Goods: Only the value of final goods gets accounted in National Income, and we can understand the discretion between final and intermediate goods via simple statements. Goods those get consumed by the final consumer or add to the capital stock of the economy are considered to be a final good and accounted in National income. Goods those are meant for further production or resale within same year are intermediate in nature and are not accounted in National income. Remember, intermediate consumption is always equal to intermediate cost. 

2.    Items included in Domestic and National Income: To know whether the stated income is a part of Domestic income or not, do remember the first W that says WHERE the income has been generated. If generated within the domestic territory of the nation, it is a part of Domestic Income, else not. To know whether the stated income is a part of National income or not, do remember the second W that says by WHOM the income has been generated. If generated by the resident of the nation, it is a part of National Income, else not. 

3.    Conversions: One of the given aggregate of National income can be converted to any of the other. For instance- Gross Domestic Product at Market price (GDPmp) can be converted to Net National Product at Factor cost (NNPFC). 
The total investment in a given period in an economy is termed as Gross Investment. By deducting depreciation from gross investment, we get net investment. Net investment is the actual measure of change in stock of productive assets. 
Net Investment = Gross Investment – Depreciation. 
The concept of domestic product is based on the production units located within economic territory, operated both by residents and non-residents. The concept of national product is based on residents, and includes their contribution to production both within and outside the economic territory. 
National product = Domestic product + Net factor income from abroad
Where, NFIA = Factor income earned from abroad – Factor income paid abroad
Money value of final goods and services produced can be estimated in two ways - at factor cost (FC) and at market price (MP). Factor cost refers to all factor payments made by the production unit (firm) to the factors of production involved in the production of goods and services. Market price is the price at which a commodity is sold and purchased in the market. When a product goes to the market for sale, government levies indirect tax (like sale tax, excise duty etc.) which is added to the factor cost of the commodity. Similarly sometimes government gives subsidy on sale of certain commodities which is subtracted from factor cost.
Market price = Factor cost + Indirect taxes – Subsidies

4.    Value added Method of calculating national income: According to this method, GDP_MP can be obtained by including value addition of each firm or all three sectors (Primary, secondary and tertiary)
 

To estimate the Gross Domestic Product at Market Price (GDP_MP), we find out the Gross Value Added at Market Price (GVA_MP) for each sector and, then take their sum to arrive at GDP_MP, i.e. sum total of GVA_MP by all the sectors = GDP_MP (i.e. GDP_MP = ΣGVA_MP)
NNP_FC = GDP_MP – Depreciation + NFIA – Net Indirect Taxes

Points to remember: 

•   Value of output can be calculated by just adding up sales, change in stock and self-consumption.
•   If sales is already given, exports should not be included separately as it is already added in sales.
•   Domestic sales can be calculated by adding sales to household, other firms and government.
•   Purchase of capital goods should not be included in intermediate cost.
•   If intermediate cost is already given, then purchase of raw material, import and power charges should not be included separately to avoid double counting.
•   Sales of one firm to other firm are treated as intermediate cost of latter one.

5.    Income Method of calculating national income: Under this method, all the factor income that accrue to the factors of production within domestic territory in terms of  rent, royalty, interest, profit, mixed income to self -employed, wages and salaries in cash and kind , social security benefits are summed up to get domestic income( NDP_FC).  

NNP_FC = NDP_FC + NFIA 

Points to remember:

• If profit is already given, do not include sub components of profit like corporate tax, dividend and retained earnings to avoid double counting.
• If profit after tax is given, also add corporate tax to get profit before tax.
• Any reimbursement of business expenses incurred by the employees will be excluded from compensation of employees as such expenses are intermediate expenditure.
• Retirement pension is not included as these are deferred payment and already included in the year in which it was accrued.

6.    Expenditure Method of calculating national income: Under this method, all the expenditure on consumer goods and investment which are produced within domestic territory incurred by households, government, rest of the world and firms are summed up to get gross domestic product at market price.

NNP_FC = GDP_MP – Depreciation + NFIA – Net Indirect Taxes

Points to remember

• Mostly students get confused between gross domestic capital formation and gross fixed capital formation. Gross domestic capital formation can be obtained by adding gross fixed capital formation and inventory investment.
• If gross domestic capital formation is not given, it can be obtained by adding gross residential construction investment, gross business fixed investment and gross public investment.
• Do not include investment on share, bonds and debentures as these are just paper claims and do not relate to flow of goods and services.