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Page 1
LEARNING OUTCOMES
.
DETERMINATION OF
NATIONAL INCOME
UNIT - 1: NATIONAL INCOME
ACCOUNTING
After studying this Chapter, you will be able to understand:
? 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.
a
CHAPTER
6
© The Institute of Chartered Accountants of India
Page 2
LEARNING OUTCOMES
.
DETERMINATION OF
NATIONAL INCOME
UNIT - 1: NATIONAL INCOME
ACCOUNTING
After studying this Chapter, you will be able to understand:
? 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.
a
CHAPTER
6
© The Institute of Chartered Accountants of India
BUSINESS ECONOMICS
a
6.2
1.1 NATIONAL INCOME ACCOUNTING
National Income Accounting, pioneered by the Nobel prize-winning economists Simon
Kuznets and Richard Stone, is the system of macro-economic accounts from the stage of
production of goods and services to the stage of their final disposal. Like any other accounting
system , the national income accounts first define concepts and then construct measures
corresponding to these concepts . National Accounts help us to understand how the various
transactions from the stage of production of goods and services to the stage of their final
disposal are interrelated and give us an idea of the working of an economy. It helps to meet
the needs of Government, private analysts, policy makers and decision takers.
The Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme
Implementation (MoSP&I) is responsible for the compilation of National accounts statistics.
At the State level, State Directorates of Economics and Statistics (DESs) have the responsibility
of compiling their State Domestic Product and other aggregates.
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.
? businesses to forecast the future demand for their products.
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
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
Page 3
LEARNING OUTCOMES
.
DETERMINATION OF
NATIONAL INCOME
UNIT - 1: NATIONAL INCOME
ACCOUNTING
After studying this Chapter, you will be able to understand:
? 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.
a
CHAPTER
6
© The Institute of Chartered Accountants of India
BUSINESS ECONOMICS
a
6.2
1.1 NATIONAL INCOME ACCOUNTING
National Income Accounting, pioneered by the Nobel prize-winning economists Simon
Kuznets and Richard Stone, is the system of macro-economic accounts from the stage of
production of goods and services to the stage of their final disposal. Like any other accounting
system , the national income accounts first define concepts and then construct measures
corresponding to these concepts . National Accounts help us to understand how the various
transactions from the stage of production of goods and services to the stage of their final
disposal are interrelated and give us an idea of the working of an economy. It helps to meet
the needs of Government, private analysts, policy makers and decision takers.
The Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme
Implementation (MoSP&I) is responsible for the compilation of National accounts statistics.
At the State level, State Directorates of Economics and Statistics (DESs) have the responsibility
of compiling their State Domestic Product and other aggregates.
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.
? businesses to forecast the future demand for their products.
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
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
a
6.3
DETERMINATION OF NATIONAL INCOME
? 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.
? Sectoral contribution to National Income information is used by the government to
decide various sector-specific development policies to increase growth rates.
? National income statistics also provide a quantitative basis for macroeconomic
modelling and analysis, for assessing and choosing economic policies and for objective
statements as well as evaluation of governments’ economic policies.
? National income estimates throw light on income distribution and the possible
inequality in the distribution among different income categories . It facilitates the
process of comparisons of structural statistics, such as ratios of investment to growth
, taxes proceeds and fiscal deficit , or government expenditures to GDP.
? 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.
? Combined with financial and monetary data, national income data provides a guide to
make policies for growth and inflation.
1.3 DIFFERENT CONCEPTS OF NATIONAL INCOME
We begin our discussion with the basic measure of output -Gross Domestic Product,
or GDP. The production side of the economy transforms inputs, such as labour and
capital, into output, GDP. Inputs such as labour and capital are called factors of
production, and the payments made to factors, such as wages and interest payments,
are called factor payments.
1.3.1 Gross Domestic Product
Nominal GDP or GDPMP
Gross domestic product (GDP) is the value of all final goods and services produced in the
country within a given period. It includes the value of goods produced, such as houses and
mobiles, and the value of services, such as telecom, health, insurance. The output of each of
these is valued at its market price, and the values are added together to get GDP MP
Nominal GDP or GDP at Current Prices in Q1 2022-23 is estimated at ? 64.95 lakh crore, as
against ? 51.27 lakh crore in Q1 2021-22, showing a growth of 26.7 percent as compared to
32.4 percent in Q1 2021-22
© The Institute of Chartered Accountants of India
Page 4
LEARNING OUTCOMES
.
DETERMINATION OF
NATIONAL INCOME
UNIT - 1: NATIONAL INCOME
ACCOUNTING
After studying this Chapter, you will be able to understand:
? 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.
a
CHAPTER
6
© The Institute of Chartered Accountants of India
BUSINESS ECONOMICS
a
6.2
1.1 NATIONAL INCOME ACCOUNTING
National Income Accounting, pioneered by the Nobel prize-winning economists Simon
Kuznets and Richard Stone, is the system of macro-economic accounts from the stage of
production of goods and services to the stage of their final disposal. Like any other accounting
system , the national income accounts first define concepts and then construct measures
corresponding to these concepts . National Accounts help us to understand how the various
transactions from the stage of production of goods and services to the stage of their final
disposal are interrelated and give us an idea of the working of an economy. It helps to meet
the needs of Government, private analysts, policy makers and decision takers.
The Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme
Implementation (MoSP&I) is responsible for the compilation of National accounts statistics.
At the State level, State Directorates of Economics and Statistics (DESs) have the responsibility
of compiling their State Domestic Product and other aggregates.
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.
? businesses to forecast the future demand for their products.
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
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
a
6.3
DETERMINATION OF NATIONAL INCOME
? 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.
? Sectoral contribution to National Income information is used by the government to
decide various sector-specific development policies to increase growth rates.
? National income statistics also provide a quantitative basis for macroeconomic
modelling and analysis, for assessing and choosing economic policies and for objective
statements as well as evaluation of governments’ economic policies.
? National income estimates throw light on income distribution and the possible
inequality in the distribution among different income categories . It facilitates the
process of comparisons of structural statistics, such as ratios of investment to growth
, taxes proceeds and fiscal deficit , or government expenditures to GDP.
? 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.
? Combined with financial and monetary data, national income data provides a guide to
make policies for growth and inflation.
1.3 DIFFERENT CONCEPTS OF NATIONAL INCOME
We begin our discussion with the basic measure of output -Gross Domestic Product,
or GDP. The production side of the economy transforms inputs, such as labour and
capital, into output, GDP. Inputs such as labour and capital are called factors of
production, and the payments made to factors, such as wages and interest payments,
are called factor payments.
1.3.1 Gross Domestic Product
Nominal GDP or GDPMP
Gross domestic product (GDP) is the value of all final goods and services produced in the
country within a given period. It includes the value of goods produced, such as houses and
mobiles, and the value of services, such as telecom, health, insurance. The output of each of
these is valued at its market price, and the values are added together to get GDP MP
Nominal GDP or GDP at Current Prices in Q1 2022-23 is estimated at ? 64.95 lakh crore, as
against ? 51.27 lakh crore in Q1 2021-22, showing a growth of 26.7 percent as compared to
32.4 percent in Q1 2021-22
© The Institute of Chartered Accountants of India
BUSINESS ECONOMICS
a
6.4
Real GDP
Nominal GDP increases over time for two reasons:
1. The production of most of goods increases over time
2. The prices of most goods also increase over time.
If our goal is to measure production and its change over time, we need to eliminate the effect
of increasing prices on our measure of GDP. That’s why real GDP is constructed as the sum of
the quantities of final goods times constant (rather than current prices)
Real GDP or Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q1 2022-23
is estimated to attain a level of ? 36.85 lakh cror e, as against ? 32.46 lakh crore in Q1
2021-22, showing a growth of 13.5 percent as compared to 20.1 percent in Q1 2021-22
REAL GDP GROWTH RATE AND INFLATION RATE
Source IMF Data Mapper Oct 2022 https://www.imf.org/en/Countries/IND
GDP Deflator
The calculation of real GDP gives us a useful measure of inflation known as GDP deflator. The
GDP deflator is the ratio of nominal GDP in a given year to real GDP of that year.
GDP Deflator =
Nominal GDP
Real GDP
x 100
© The Institute of Chartered Accountants of India
Page 5
LEARNING OUTCOMES
.
DETERMINATION OF
NATIONAL INCOME
UNIT - 1: NATIONAL INCOME
ACCOUNTING
After studying this Chapter, you will be able to understand:
? 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.
a
CHAPTER
6
© The Institute of Chartered Accountants of India
BUSINESS ECONOMICS
a
6.2
1.1 NATIONAL INCOME ACCOUNTING
National Income Accounting, pioneered by the Nobel prize-winning economists Simon
Kuznets and Richard Stone, is the system of macro-economic accounts from the stage of
production of goods and services to the stage of their final disposal. Like any other accounting
system , the national income accounts first define concepts and then construct measures
corresponding to these concepts . National Accounts help us to understand how the various
transactions from the stage of production of goods and services to the stage of their final
disposal are interrelated and give us an idea of the working of an economy. It helps to meet
the needs of Government, private analysts, policy makers and decision takers.
The Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme
Implementation (MoSP&I) is responsible for the compilation of National accounts statistics.
At the State level, State Directorates of Economics and Statistics (DESs) have the responsibility
of compiling their State Domestic Product and other aggregates.
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.
? businesses to forecast the future demand for their products.
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
CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
a
6.3
DETERMINATION OF NATIONAL INCOME
? 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.
? Sectoral contribution to National Income information is used by the government to
decide various sector-specific development policies to increase growth rates.
? National income statistics also provide a quantitative basis for macroeconomic
modelling and analysis, for assessing and choosing economic policies and for objective
statements as well as evaluation of governments’ economic policies.
? National income estimates throw light on income distribution and the possible
inequality in the distribution among different income categories . It facilitates the
process of comparisons of structural statistics, such as ratios of investment to growth
, taxes proceeds and fiscal deficit , or government expenditures to GDP.
? 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.
? Combined with financial and monetary data, national income data provides a guide to
make policies for growth and inflation.
1.3 DIFFERENT CONCEPTS OF NATIONAL INCOME
We begin our discussion with the basic measure of output -Gross Domestic Product,
or GDP. The production side of the economy transforms inputs, such as labour and
capital, into output, GDP. Inputs such as labour and capital are called factors of
production, and the payments made to factors, such as wages and interest payments,
are called factor payments.
1.3.1 Gross Domestic Product
Nominal GDP or GDPMP
Gross domestic product (GDP) is the value of all final goods and services produced in the
country within a given period. It includes the value of goods produced, such as houses and
mobiles, and the value of services, such as telecom, health, insurance. The output of each of
these is valued at its market price, and the values are added together to get GDP MP
Nominal GDP or GDP at Current Prices in Q1 2022-23 is estimated at ? 64.95 lakh crore, as
against ? 51.27 lakh crore in Q1 2021-22, showing a growth of 26.7 percent as compared to
32.4 percent in Q1 2021-22
© The Institute of Chartered Accountants of India
BUSINESS ECONOMICS
a
6.4
Real GDP
Nominal GDP increases over time for two reasons:
1. The production of most of goods increases over time
2. The prices of most goods also increase over time.
If our goal is to measure production and its change over time, we need to eliminate the effect
of increasing prices on our measure of GDP. That’s why real GDP is constructed as the sum of
the quantities of final goods times constant (rather than current prices)
Real GDP or Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q1 2022-23
is estimated to attain a level of ? 36.85 lakh cror e, as against ? 32.46 lakh crore in Q1
2021-22, showing a growth of 13.5 percent as compared to 20.1 percent in Q1 2021-22
REAL GDP GROWTH RATE AND INFLATION RATE
Source IMF Data Mapper Oct 2022 https://www.imf.org/en/Countries/IND
GDP Deflator
The calculation of real GDP gives us a useful measure of inflation known as GDP deflator. The
GDP deflator is the ratio of nominal GDP in a given year to real GDP of that year.
GDP Deflator =
Nominal GDP
Real GDP
x 100
© The Institute of Chartered Accountants of India
a
6.5
DETERMINATION OF NATIONAL INCOME
The GDP deflator, as the name implies, can be used to ‘deflate’ or take inflation out of GDP.
In other words, the GDP deflator is a price index used to convert nominal GDP to real GDP
Real GDP =
Nominal GDP
GDP Deflator
x 100
The deflator measures the current level of prices relative to the level of prices in the base year.
Since nominal GDP and real GDP must be the same in the base year, the deflator for the base
year is always 100.
As you know, inflation is a closely monitored aspect of macroeconomic performance and a
significant variable guiding macroeconomic policy. Using the GDP deflator, the inflation rate
between two consecutive years can be compute using the following procedure:
Inflation rate in year 2 =
GDP deflator in year 2 -GDP deflator in year 1
GDP deflator in year 1
x 100
GDP Deflator in India is expected to reach 154.87 points by the end of 2022, according to
Trading Economics global macro models and analysts expectations. In the long-term, the India
GDP Deflator is projected to trend around 167.94 points in 2023 and 175.67 points in 2024,
according to econometric models.
Inflation Rate in 2023 = (167.94 - 154.87) / 154.87 * 100
Inflation Rate in 2023 as compared to 2022 will be 8.439 percent.
Numerical Illustrations
ILLUSTRATION 1
Find out GDP Deflator? Interpret It
(In Billion Rs.)
Years Nominal GDP Real GDP GDP Deflator
2014 500 500 100
2015 800 650 123.08
2016 1150 800 143.75
2017 1300 950 136.84
2018 1550 1190 130.25
2019 1700 1240 137.10
SOLUTION
A deflator above 100 is an indication of price levels being higher as compared to the base
year. From years 2015 through 2019, we find that price levels are higher than that of the base
year, the highest being in the year 2016.If the GDP deflator is greater than 100, then nominal
© The Institute of Chartered Accountants of India
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