NATIONAL INCOME

ACCOUNTING

GROSS DOMESTIC PRODUCT

Value of all final goods and services produced within the boundary of a

nation during one year , irrespective of the ownership.

GROSS NATIONAL PRODUCT

Value of all final goods and services produced by residents of a nation

during one year.

USES OF CONCEPT OF GDP

▪ Growth rate of the country – Per annum percentage change in GDP

▪ Quantitative concept and its volume or size indicates the internal strength

of the economy

▪ It is used by the IMF/ World Bank in the comparative analysis of its member

nations

GDP Deflator

▪ Real GDP- Goods and services are evaluated at some constant set of

prices

▪ Nominal GDP- value of goods and services are evaluated at some current

set of prices.

▪ GDP Deflator = Nominal GDP/ Real GDP

▪ Net Domestic Product(NDP)= GDP – depreciation

▪ GNP= GDP + Net factor income from abroad

▪ GNP at factor cost = GNP at Market prices – Indirect Taxes + subsidies

▪ NNP at F.C = NNP at M.P - Indirect Taxes + subsidies

▪ Market Cost – It refers to the actual transacted price and it includes indirect

taxes such as custom duty, excise duty, sales tax, service tax, etc.

▪ Factor Cost – it refers to the actual cost of various factors of production and

it includes government grants and it excludes indirect taxes.

METHODS TO CALCULATE

GDP

INCOME METHOD:

▪ Income received by all factors of production in producing final goods and

services.

▪ We adopted it in 2014-15 onwards.

GV@Basic Prices = Compensation to Employees(CE) + Operating Surplus(OS)/

Mixed income(MI) + Consumption of fixed capital(CFC) + Production taxes –

Production subsidies

GDP@constant market prices = GV@Basic Prices + Product Taxes – Product

subsidies

COMPENSATION TO EMPLOYESS

▪ It is the composite value of wages and salaries paid in the sector including

social contribution made by the employer representing the income share

of the employees in GVA. In agriculture , returns to the farmers working on

their own fields hired by them become part of the Mixed Income

Operating Surplus

OS is difference b/w Net value added & compensation of employees.

NVA is value of o/p minus value of both intermediate consumption & CFCs

Consumption of Fixed Capital

CFC represent the amount of fixed asset used up during the period

considered, as a result of normal wear & tear.

MIXED CAPITAL(MI)

MI is a result of existence of un-incorporated enterprises & house hold

industries in the in un-organized sector, which either don’t maintain

accounts or are wholly managed by self employed workers.

Net Value Added (NVA)- can’t be separated as income of labour &

entrepreneurship.This lead to an introduction of an item called mixed

income of self employed to complete the account.

Production tax like land revenue tax, stamp duty, registration fees, etc.

Production subsidies like subsidies to railways, input subsidies to farmers

subsidies to village & small industries etc.

Product tax- Sales tax, excise duty, service tax etc.

Product subsidies – Petroleum subsidy, interest subsidy given through banks,

subsidies for providing insurance to household.

2. EXPENDITURE METHOD

GDP = consumption (c) + investment(I) + Govt. expenditure(G) + Net

exports(E)

GDP@MP = Personal final consumption expenditure + Gross Domestic

Capital formation + Govt. final consumption expenditure + Net export.

GDP @ MP = Depreciation – Net indirect taxes + NFIA = NNP@FC

3. VALUE ADDED OR OUTPUT OR

PRODUCT METHOD

▪ It was used for primary sector

▪ A method for computing GDP , which multiples final output with market

price.

PROBLEMS IN CALCULATING NATIONAL

INCOME

1. Problem of double counting

2. Black money

3. Non- monetization

4. Household services

5. Social services

6. Environment cost

PROBLEMS WITH GDP CONCEPT

1. GDP is not a measure of overall wellbeing of a country

2. GDP is not telling what is all happening with citizens of the country

3. GDP is not providing information on resource depletion , land degradation

and sustainability

INCLUSIVE GROWTH

It is a qualitative approach of development, which aims at capacity

enhancement, capability creation and skill formation by eradicating poverty,

increase in education, and where everyone contributes to increase the GDP

of the nation.

PURCHASING POWER PARITY

▪ Exchange rate between the two currencies is equal to the ratio of the

currencies respective purchasing power.

▪ PP conversion factor is the number of units of currency required to buy the

same amount of goods and services in the domestic market as the dollar

will buy in United States

HARROD DOMAR MODEL

▪ Higher the investment, higher will be the savings

▪ The amount of the capital required to produce one unit of output is

incremental capital output rate(ICOR)

▪ ICOR reflects how efficiently capital is being used to generate additional

output.

▪ ICOR measures capital intensity and efficiency.

▪ ICOR = Annual Investment / Annual increase in GDP