Unit I: National Income Accounting | Financial Management & Economics Finance: CA Intermediate (Old Scheme) PDF Download

 Page 1


LEARNING OUTCOMES 
 
 
 DETERMINATION OF 
 NATIONAL INCOME 
UNIT I:  NATIONAL INCOME ACCOUNTING 
At the end of this unit, you will be able to: 
? Define national income 
? Explain the usefulness and significance of national income 
estimates 
? Differentiate among the various concepts of national 
income 
? Describe the different methods of calculation of national 
income 
? Outline measurement of national income in India 
? Describe the system of regional accounts in India 
? Identify the challenges involved in national income 
computation. 
CHAPTER 
1 
Page 2


LEARNING OUTCOMES 
 
 
 DETERMINATION OF 
 NATIONAL INCOME 
UNIT I:  NATIONAL INCOME ACCOUNTING 
At the end of this unit, you will be able to: 
? Define national income 
? Explain the usefulness and significance of national income 
estimates 
? Differentiate among the various concepts of national 
income 
? Describe the different methods of calculation of national 
income 
? Outline measurement of national income in India 
? Describe the system of regional accounts in India 
? Identify the challenges involved in national income 
computation. 
CHAPTER 
1 
1.2 ECONOMICS FOR FINANCE 
 
 
 1.1 INTRODUCTION 
The performance of an economy depends on the output of goods and services 
produced by it. Just as there are accounting conventions which measure the 
performance of business, there are conventions for measuring and analyzing the 
economic performance of a nation.  National Income Accounting, pioneered by 
the Nobel prize-winning economists Simon Kuznets and Richard Stone, is one 
such measure. National income is an important macroeconomic aggregate 
forming the basis of modern macroeconomic analysis and provides detailed 
measures of the value and composition of national output and incomes 
generated in the production of that output.  
National Income is defined as the net value of all economic goods and services 
produced within the domestic territory of a country in an accounting year plus the 
net factor income from abroad. According to the Central Statistical Organisation 
(CSO)  ‘National income is the sum total of factor incomes generated by the 
normal residents of a country in the form of wages, rent, interest and profit in an 
accounting year’.  
 1.2 USEFULNESS AND SIGNIFICANCE OF 
NATIONAL INCOME ESTIMATES 
National income accounts are fundamental aggregate statistics in macroeconomic 
analysis and are extremely useful, especially for the emerging and transition 
economies. 
Determination of 
National Income
National Income 
Accounting
Different concepts of 
National Income
Measurement of 
National Income in 
India
Limitations and 
Challenges of National 
Income Computation
UNIT OVERVIEW 
Page 3


LEARNING OUTCOMES 
 
 
 DETERMINATION OF 
 NATIONAL INCOME 
UNIT I:  NATIONAL INCOME ACCOUNTING 
At the end of this unit, you will be able to: 
? Define national income 
? Explain the usefulness and significance of national income 
estimates 
? Differentiate among the various concepts of national 
income 
? Describe the different methods of calculation of national 
income 
? Outline measurement of national income in India 
? Describe the system of regional accounts in India 
? Identify the challenges involved in national income 
computation. 
CHAPTER 
1 
1.2 ECONOMICS FOR FINANCE 
 
 
 1.1 INTRODUCTION 
The performance of an economy depends on the output of goods and services 
produced by it. Just as there are accounting conventions which measure the 
performance of business, there are conventions for measuring and analyzing the 
economic performance of a nation.  National Income Accounting, pioneered by 
the Nobel prize-winning economists Simon Kuznets and Richard Stone, is one 
such measure. National income is an important macroeconomic aggregate 
forming the basis of modern macroeconomic analysis and provides detailed 
measures of the value and composition of national output and incomes 
generated in the production of that output.  
National Income is defined as the net value of all economic goods and services 
produced within the domestic territory of a country in an accounting year plus the 
net factor income from abroad. According to the Central Statistical Organisation 
(CSO)  ‘National income is the sum total of factor incomes generated by the 
normal residents of a country in the form of wages, rent, interest and profit in an 
accounting year’.  
 1.2 USEFULNESS AND SIGNIFICANCE OF 
NATIONAL INCOME ESTIMATES 
National income accounts are fundamental aggregate statistics in macroeconomic 
analysis and are extremely useful, especially for the emerging and transition 
economies. 
Determination of 
National Income
National Income 
Accounting
Different concepts of 
National Income
Measurement of 
National Income in 
India
Limitations and 
Challenges of National 
Income Computation
UNIT OVERVIEW 
 
 
1.3 
 
 NATIONAL INCOME ACCOUNTING 
1. National income accounts provide a comprehensive, conceptual and 
accounting framework for analyzing and evaluating the short-run 
performance of an economy. The level of national income indicates the level 
of economic activity and economic development as well as aggregate 
demand for goods and services of a country.  
2. The distribution pattern of national income determines the pattern of 
demand for goods and services and enables businesses to forecast the 
future demand for their products. 
3. Economic welfare depends to a considerable extent on the magnitude and 
distribution of national income, size of per capita income and the growth of 
these over time.  
4. The estimates of national income show the composition and structure of 
national income in terms of different sectors of the economy, the periodical 
variations in them and the broad sectoral shifts in an economy over time. It 
is also possible to make temporal and spatial comparisons of the trend and 
speed of economic progress and development. Using this information, the 
government can fix various sector-specific development targets for different 
sectors of the economy and formulate suitable development plans and 
policies to increase growth rates. 
5. National income statistics also provide a quantitative basis for 
macroeconomic modelling and analysis, for assessing and choosing 
economic policies and for objective statement as well as evaluation of 
governments’ economic policies. These figures often influence popular and 
political judgments about the relative success of economic programmes. 
6. National income estimates throw light on income distribution and the 
possible inequality in the distribution among different categories of income 
earners. It is also possible to make comparisons of structural statistics, such 
as ratios of investment, taxes, or government expenditures to GDP.  
7. International comparisons in respect of incomes and living standards assist 
in determining eligibility for loans, and/or other funds or conditions under 
which such loans, and/ or funds are made available.  The national income 
data are also useful to determine the share of nation’s contributions to 
various international bodies. 
8. Combined with financial and monetary data, national income data provides 
a guide to make policies for growth and inflation.  
Page 4


LEARNING OUTCOMES 
 
 
 DETERMINATION OF 
 NATIONAL INCOME 
UNIT I:  NATIONAL INCOME ACCOUNTING 
At the end of this unit, you will be able to: 
? Define national income 
? Explain the usefulness and significance of national income 
estimates 
? Differentiate among the various concepts of national 
income 
? Describe the different methods of calculation of national 
income 
? Outline measurement of national income in India 
? Describe the system of regional accounts in India 
? Identify the challenges involved in national income 
computation. 
CHAPTER 
1 
1.2 ECONOMICS FOR FINANCE 
 
 
 1.1 INTRODUCTION 
The performance of an economy depends on the output of goods and services 
produced by it. Just as there are accounting conventions which measure the 
performance of business, there are conventions for measuring and analyzing the 
economic performance of a nation.  National Income Accounting, pioneered by 
the Nobel prize-winning economists Simon Kuznets and Richard Stone, is one 
such measure. National income is an important macroeconomic aggregate 
forming the basis of modern macroeconomic analysis and provides detailed 
measures of the value and composition of national output and incomes 
generated in the production of that output.  
National Income is defined as the net value of all economic goods and services 
produced within the domestic territory of a country in an accounting year plus the 
net factor income from abroad. According to the Central Statistical Organisation 
(CSO)  ‘National income is the sum total of factor incomes generated by the 
normal residents of a country in the form of wages, rent, interest and profit in an 
accounting year’.  
 1.2 USEFULNESS AND SIGNIFICANCE OF 
NATIONAL INCOME ESTIMATES 
National income accounts are fundamental aggregate statistics in macroeconomic 
analysis and are extremely useful, especially for the emerging and transition 
economies. 
Determination of 
National Income
National Income 
Accounting
Different concepts of 
National Income
Measurement of 
National Income in 
India
Limitations and 
Challenges of National 
Income Computation
UNIT OVERVIEW 
 
 
1.3 
 
 NATIONAL INCOME ACCOUNTING 
1. National income accounts provide a comprehensive, conceptual and 
accounting framework for analyzing and evaluating the short-run 
performance of an economy. The level of national income indicates the level 
of economic activity and economic development as well as aggregate 
demand for goods and services of a country.  
2. The distribution pattern of national income determines the pattern of 
demand for goods and services and enables businesses to forecast the 
future demand for their products. 
3. Economic welfare depends to a considerable extent on the magnitude and 
distribution of national income, size of per capita income and the growth of 
these over time.  
4. The estimates of national income show the composition and structure of 
national income in terms of different sectors of the economy, the periodical 
variations in them and the broad sectoral shifts in an economy over time. It 
is also possible to make temporal and spatial comparisons of the trend and 
speed of economic progress and development. Using this information, the 
government can fix various sector-specific development targets for different 
sectors of the economy and formulate suitable development plans and 
policies to increase growth rates. 
5. National income statistics also provide a quantitative basis for 
macroeconomic modelling and analysis, for assessing and choosing 
economic policies and for objective statement as well as evaluation of 
governments’ economic policies. These figures often influence popular and 
political judgments about the relative success of economic programmes. 
6. National income estimates throw light on income distribution and the 
possible inequality in the distribution among different categories of income 
earners. It is also possible to make comparisons of structural statistics, such 
as ratios of investment, taxes, or government expenditures to GDP.  
7. International comparisons in respect of incomes and living standards assist 
in determining eligibility for loans, and/or other funds or conditions under 
which such loans, and/ or funds are made available.  The national income 
data are also useful to determine the share of nation’s contributions to 
various international bodies. 
8. Combined with financial and monetary data, national income data provides 
a guide to make policies for growth and inflation.  
1.4 ECONOMICS FOR FINANCE 
9. National income or a relevant component of it is an indispensable variable 
considered in economic forecasting and to make projections about the 
future development trends of the economy. 
 1.3 DIFFERENT CONCEPTS OF NATIONAL 
INCOME  
The basic concepts and definitions of the terms used in national accounts largely 
follow those given in the UN System of National Accounts (SNA) developed by 
United Nations to provide a comprehensive, conceptual and accounting 
framework for compiling and reporting macroeconomic statistics for analysing 
and evaluating the performance of an economy. Each of these concepts has a 
specific meaning, use and method of measurement.  
National income accounts have three sides: a product side, an expenditure side 
and an income side. The product side measures production based on concept of 
value added. The expenditure side looks at the final sales of goods and services, 
whereas the income side measures the distribution of the proceeds from sales to 
different factors of production. Accordingly, national income is a measure of the 
total flow of ‘earnings of the factor-owners’ which they receive through the 
production of goods and services. Thus, national income is the sum total of all the 
incomes accruing over a specified period to the residents of a country and 
consists of wages, salaries, profits, rent and interest. 
On the product side there are two widely reported measures of overall production 
namely, Gross Domestic Product (GDP) and Gross National Product (GNP). 
1.3.1 Gross Domestic Product (GDP
 MP
) 
Gross domestic product (GDP) is a measure of the market value of all final 
economic goods and services, gross of depreciation, produced within the 
domestic territory of a country during a given time period. It is the sum total of 
‘value added’ by all producing units in the domestic territory and includes value 
added by current production by foreign residents or foreign-owned firms. The 
term ‘gross’ implies that GDP is measured ‘gross’ of depreciation.’ Domestic’ 
refers to ‘the geographic confines’ of a country. For example, if a Chinese citizen 
works temporarily in India, her production is part of the Indian GDP. If an Indian 
citizen owns a factory in another country, for e.g. Germany, the production at her 
factory is not part of India’s GDP. However, GDP excludes transfer payments, 
Page 5


LEARNING OUTCOMES 
 
 
 DETERMINATION OF 
 NATIONAL INCOME 
UNIT I:  NATIONAL INCOME ACCOUNTING 
At the end of this unit, you will be able to: 
? Define national income 
? Explain the usefulness and significance of national income 
estimates 
? Differentiate among the various concepts of national 
income 
? Describe the different methods of calculation of national 
income 
? Outline measurement of national income in India 
? Describe the system of regional accounts in India 
? Identify the challenges involved in national income 
computation. 
CHAPTER 
1 
1.2 ECONOMICS FOR FINANCE 
 
 
 1.1 INTRODUCTION 
The performance of an economy depends on the output of goods and services 
produced by it. Just as there are accounting conventions which measure the 
performance of business, there are conventions for measuring and analyzing the 
economic performance of a nation.  National Income Accounting, pioneered by 
the Nobel prize-winning economists Simon Kuznets and Richard Stone, is one 
such measure. National income is an important macroeconomic aggregate 
forming the basis of modern macroeconomic analysis and provides detailed 
measures of the value and composition of national output and incomes 
generated in the production of that output.  
National Income is defined as the net value of all economic goods and services 
produced within the domestic territory of a country in an accounting year plus the 
net factor income from abroad. According to the Central Statistical Organisation 
(CSO)  ‘National income is the sum total of factor incomes generated by the 
normal residents of a country in the form of wages, rent, interest and profit in an 
accounting year’.  
 1.2 USEFULNESS AND SIGNIFICANCE OF 
NATIONAL INCOME ESTIMATES 
National income accounts are fundamental aggregate statistics in macroeconomic 
analysis and are extremely useful, especially for the emerging and transition 
economies. 
Determination of 
National Income
National Income 
Accounting
Different concepts of 
National Income
Measurement of 
National Income in 
India
Limitations and 
Challenges of National 
Income Computation
UNIT OVERVIEW 
 
 
1.3 
 
 NATIONAL INCOME ACCOUNTING 
1. National income accounts provide a comprehensive, conceptual and 
accounting framework for analyzing and evaluating the short-run 
performance of an economy. The level of national income indicates the level 
of economic activity and economic development as well as aggregate 
demand for goods and services of a country.  
2. The distribution pattern of national income determines the pattern of 
demand for goods and services and enables businesses to forecast the 
future demand for their products. 
3. Economic welfare depends to a considerable extent on the magnitude and 
distribution of national income, size of per capita income and the growth of 
these over time.  
4. The estimates of national income show the composition and structure of 
national income in terms of different sectors of the economy, the periodical 
variations in them and the broad sectoral shifts in an economy over time. It 
is also possible to make temporal and spatial comparisons of the trend and 
speed of economic progress and development. Using this information, the 
government can fix various sector-specific development targets for different 
sectors of the economy and formulate suitable development plans and 
policies to increase growth rates. 
5. National income statistics also provide a quantitative basis for 
macroeconomic modelling and analysis, for assessing and choosing 
economic policies and for objective statement as well as evaluation of 
governments’ economic policies. These figures often influence popular and 
political judgments about the relative success of economic programmes. 
6. National income estimates throw light on income distribution and the 
possible inequality in the distribution among different categories of income 
earners. It is also possible to make comparisons of structural statistics, such 
as ratios of investment, taxes, or government expenditures to GDP.  
7. International comparisons in respect of incomes and living standards assist 
in determining eligibility for loans, and/or other funds or conditions under 
which such loans, and/ or funds are made available.  The national income 
data are also useful to determine the share of nation’s contributions to 
various international bodies. 
8. Combined with financial and monetary data, national income data provides 
a guide to make policies for growth and inflation.  
1.4 ECONOMICS FOR FINANCE 
9. National income or a relevant component of it is an indispensable variable 
considered in economic forecasting and to make projections about the 
future development trends of the economy. 
 1.3 DIFFERENT CONCEPTS OF NATIONAL 
INCOME  
The basic concepts and definitions of the terms used in national accounts largely 
follow those given in the UN System of National Accounts (SNA) developed by 
United Nations to provide a comprehensive, conceptual and accounting 
framework for compiling and reporting macroeconomic statistics for analysing 
and evaluating the performance of an economy. Each of these concepts has a 
specific meaning, use and method of measurement.  
National income accounts have three sides: a product side, an expenditure side 
and an income side. The product side measures production based on concept of 
value added. The expenditure side looks at the final sales of goods and services, 
whereas the income side measures the distribution of the proceeds from sales to 
different factors of production. Accordingly, national income is a measure of the 
total flow of ‘earnings of the factor-owners’ which they receive through the 
production of goods and services. Thus, national income is the sum total of all the 
incomes accruing over a specified period to the residents of a country and 
consists of wages, salaries, profits, rent and interest. 
On the product side there are two widely reported measures of overall production 
namely, Gross Domestic Product (GDP) and Gross National Product (GNP). 
1.3.1 Gross Domestic Product (GDP
 MP
) 
Gross domestic product (GDP) is a measure of the market value of all final 
economic goods and services, gross of depreciation, produced within the 
domestic territory of a country during a given time period. It is the sum total of 
‘value added’ by all producing units in the domestic territory and includes value 
added by current production by foreign residents or foreign-owned firms. The 
term ‘gross’ implies that GDP is measured ‘gross’ of depreciation.’ Domestic’ 
refers to ‘the geographic confines’ of a country. For example, if a Chinese citizen 
works temporarily in India, her production is part of the Indian GDP. If an Indian 
citizen owns a factory in another country, for e.g. Germany, the production at her 
factory is not part of India’s GDP. However, GDP excludes transfer payments, 
 
 
1.5 
 
 NATIONAL INCOME ACCOUNTING 
financial transactions and non-reported output generated through illegal 
transactions such as narcotics and gambling. 
Gross Domestic Product (GDP) is in fact Gross Domestic Product at market prices 
(GDP 
MP
) because the value of goods and services is determined by the common 
measuring unit of money or it is evaluated at market prices. Money enables us to 
measure and find the aggregate of different types of products expressed in 
different units of measurement by converting them in terms of Rupees, say 
tonnes of wheat may, thus, be added with millions of apples and with value of 
services such as airplane journeys. 
         GDP
MP   
=  Value of Output in the Domestic Territory – Value of  
  Intermediate Consumption 
 GDP 
MP  
= ? Value Added 
While learning about national income, there are a few important points which one 
needs to bear in mind:  
(i) The value of only final goods and services or only the value added by the 
production process would be included in GDP. Final goods refer to those 
goods which are used either for consumption or for investment. They are 
neither resold nor undergo further transformation in the process of 
production. The distinction between intermediate goods and final goods is 
made on the basis of end use: if the good is for consumption or investment, 
then it is a final good.  By ‘value added’ we mean the difference between 
value of output and purchase of intermediate goods. Value added 
represents the contribution of labour and capital to the production process.  
(ii) Intermediate goods refer to those goods which are used either for resale or 
for further production in the same year. They do not end up in final 
consumption, and are not capital goods either. 
 They have derived demand. Intermediate goods are used up in the same 
year; if they remain for more than one year, then they are treated as final 
goods.  Intermediate consumption consists of the value of the goods and 
services consumed as inputs by a process of production, excluding fixed 
assets whose consumption is recorded as consumption of fixed capital. 
Intermediate goods used to produce other goods rather than being sold to 
final purchasers are not counted as it would involve double counting. The 
intermediate goods or services may be either transformed or used up by the