Basic Concepts of National Income Accounting

For measurement purpose we have to explain the basic concepts used in national income Accounting. They are:

Gross Domestic Product (GDP)

GDP is the total value of goods and services produced within the country during a year. This is calculated at market prices and is known as GDP at market prices. Dernberg defines GDP at market price as “the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year.”

Net Domestic Product (NDP)

NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wears out or becomes obsolete each year during the production process. The value of this capital consumption is some percentage of gross investment which is deducted from GDP. Thus Net Domestic Product = GDP at Factor Cost – Depreciation.

Domestic Factor Income

The income generated within the domestic territory of a country by all the producers is called domestic factor income. It is also net value added at factor cost. Net domestic product can be defined as the net value added by all the producers within the domestic territory of the country.

Domestic factor income is divided into:

  1. Compensation of employees
  2. Operating surplus
  3. Mixed income of self employed. In India,Domestic factor income = Compensation of Employees + rent + interest + profits + mixed income of self employed.

Net National Income at Market Prices

It is equal to NNP at factor cost + net indirect taxes. Net national product at factor cost is equal to national income. It is equal to domestic factor income + net factor income earned abroad – indirect taxes + subsidies.

National income is always less than the gross national product. The factors of production do not always receive as income the full value of output they produce. This is for two reasons.

  1. The firms that hire factors will have to pay indirect taxes like sales tax,excise duty etc,to the government and such payments cut down the income that can be paid to factors.
  2. Part of the income is set aside to replace worn out capital goods.

National Income at Factor Cost

When we value goods and services included in GNP,we take market prices. Market-price include indirect taxes and subsidies. If we deduct indirect taxes and add subsidies,we get national income at factor cost. This is equal to the cost of production of goods included in national income. It is equal to the total factor payments,i.e.rent +wages + interests and profits.

National income at factor cost = National income at market prices – indirect taxes + subsidies.

Private Income

Private income consists of factor incomes earned within the domestic territory and abroad by private enterprises and workers and current transfers from the government and rest of the world. Private income = Factor income from net domestic product accruing to the private sector + national debt interest + net factor income from abroad + current transfers from government + other current transfers from the rest of the world.

Personal Income

It is defined as the current income of persons or households from all sources. To arrive at personal income,we have to deduct undistributed profits and corporation tax paid by the enterprises. Personal income = Nat national income + transfer payments(corporation taxes + Ploughed back profits).

Personal Disposable Income

It is equal to personal income – direct taxes paid + miscellaneous payments to government. It is the income available with households for spending. People spend a part of the disposable income and save the rest.

Per Capita Income

Per capita income is equal to national income divided by total population. Sometimes an increase in the real national income may not improve the level of living the people. Let us suppose that the national income in an real term is growing at 2% per annum in a country and population is also growing at the same rate. In other words, there would be no improvement in the standard of living of people. For economic growth,it is essential that the growth of real income should be faster than the growth of population.