Reasons for Growing Importance of National Income Studies

Governments also look at figures such as GDP growth and unemployment to set fiscal policy in terms of tax rates and infrastructure spending. Globally, the International Monetary Fund (IMF), the World Bank, and the Organization for Economic Cooperation and Development (OECD) put together national income accounting information and publish it. Additionally, national income accounting provides a method for comparing activities within different sectors in an economy, as well as changes within those sectors over time. A thorough analysis can assist in determining overall economic stability within a nation. In the expenditure method, the national income is measured by adding up the expenditures made by individuals, companies, and the government. Thus, it combines consumer spending, investments made by companies, net exports, and government spending to calculate the national income.

Therefore, it becomes difficult to compare the national income of various countries. The information provided by them is generally inaccurate and wrong and hence it is not possible to collect reliable information for national income. Therefore, economic welfare depends not only on the volume of consumption but also on the type of goods and services consumed. This should be considered while drawing conclusions about economic welfare from GDP. By national income, we can get data pertaining to wages, profits and interest which enables us to learn about the disparities in income among the different sections of the society.

Indian Economy 1950 to 1990 Class 12 Notes PDF

By summing up all the expenses in the economy, we can arrive at the exact figure, at least in theory, as in the income approach. Mack Ott is an international economic consultant whose major assignments have been in the former Soviet Union countries, the Balkans, and Egypt. During 2003 and 2004 he was macroeconomic adviser to the chief economist of Nigeria and to the West African Monetary Institute. (9) National income statistics also helps us to know about the economic problems of underdeveloped countries.

The way GDP versus GNP is measured is by including different items in the export and import terms. As noted above, GDP includes only exports and imports of goods and services, implying also that GDP excludes income payments and receipts and unilateral transfers. When these latter items are included in the national income identity and the current account balance is used for EX − IM, the national income variable becomes the GNP. Thus the GNP measure includes income payments and receipts and unilateral transfers.

Importance of National Income Accounting

The balance of payments accounts is a record of all international transactions that are undertaken between residents of one country and residents of other countries during the year. The accounts are divided into several subaccounts, the most important being the current accountA record of all international transactions for goods and services, income payments and receipts, and unilateral transfers. And the financial accountA record of all international transactions for assets.. The current account is often further subdivided into the merchandise trade account and the service account.

But Real GDP does not consider the changes in the population of a country. The prosperity of the country is better judged by the per capita real GDP. The per capita real GDP equals total real GDP divided by population. Free education, medical aid and social security schemes go a long way to reducing income and inequalities.

Components of national income

For example services of housewives and other family members (leisure time activities) etc. By national income, different departments can get the information on how to divide and use the national expenditure between consumption expenditure and investment expenditure. Personal income is derived from national income by deducting undistributed corporate profits, profit taxes, and employee’s contributions to social security schemes.

This will cause some people to secure jobs while others will remain unemployed. The supply of loanable funds consists of lenders willing to lend their money to borrowers in exchange for a price paid on their money. But the most shocking results can only be seen when we compare them to the national income of the United States. We have illustrated the results in Figure 3 below where we can clearly see the gap between the national income of the United States and other countries. In the contemporary world, we most often use Gross Domestic Product (GDP) as a measurement of a nation’s income.

The Circular Flow Model of the Economy:

Gross domestic product relates to the product of the factors of production employed within the political boundaries i.e., within domestic territory. It is defined as a measure of the total flow of goods and services produced by an economy over a specified time period, importance of national income accounting usually a year. Assume that there are more capital inflows than capital outflows, meaning more investment is coming in the country than exiting. This would cause an increase in demand for the local currency, which causes the nominal exchange rate to appreciate.

• Industrial Origin The contribution of an industry to gross domestic product is its gross value added, that is, the industry’s output less purchases of products and services from other industries (Table 3, column 3).
• When transfer payments are included, government spending plus transfers as a percentage of GDP exceeds 30 percent in the United States.
• Per capita income can indicate the rise or fall in the standard of living of the people.
• Line 68, $45 billion, shows deposits and purchases of U.S. assets by foreigners reported by U.S. nonbanks.
• National income can be calculated a number of methods like the expenditure approach, income approach, and value-added approach.
• Excluding capital gains creates difficulties in measuring the output of financial institutions.

Otherwise, all the imports, exports, foreign trades, taxes, wages come under the Gross National Product. National income figures are an important tool of macro-economic analysis and policy, national income estimates are the most comprehensive measures of aggregate economic activity in an economy. It is through such estimates that we know the aggregate yield of the economy and lay down future economic policy for development. From the gross national product so estimated, we have to deduct the depreciation of equipment and machinery involved in the process of production to arrive at the country’s national income. Personal income is the total income received by the individuals of a country from all sources before direct taxes in one year. Personal income is never equal to the national income because the former includes the transfer payments whereas they are not included in national income.

What are the limitations of national income?

The balance on each of these accounts is found by taking the difference between exports and imports. Capital goods are those final goods that help in the production of other goods and services. A machine purchased by a firm will be a capital good when it is used for the production of other goods and services. However, if it is purchased by a firm for resale purposes in the same year, it will be considered as an intermediate good and not a capital good.