1. Introduction to National Income Accounting

• National Income Accounting measures the overall economic activity of a nation. It summarises production, income creation, and expenditure flows for one year.
• It helps evaluate economic growth, policy design, and living standards.
• All transactions are expressed in monetary terms so that different goods and services can be aggregated.
• Major measures: GDP, GNP, NNP, National Income (NI), and Per Capita Income (PCI).

2. Some Basic Concepts of Macroeconomics

• Macroeconomics analyses the functioning of an entire economy—its output, employment, price level, investment, and financial flows.
• It considers economy‑wide aggregates instead of individual markets.
• Key variables:
  • Aggregate Output (total production)
  • Aggregate Income (sum of factor earnings)
  • Aggregate Expenditure (C + I + G + X – M)
• These aggregates interact through the Circular Flow of Income.

3. Circular Flow of Income

• Shows continuous movement of money and goods between households and firms (and later, government and foreign sector).
• Two‑sector model:

• Adding leakages and injections gives extended models:
• Leakages = Savings, Taxes, Imports.
• Injections = Investment, Govt Spending, Exports.

4. Methods of Calculating National Income

There are three inter‑connected methods used by statistical authorities like the CSO to compute National Income:

• 1. Product or Value Added Method
• 2. Expenditure Method
• 3. Income Method

Each method focuses on a different aspect of the same circular flow — production, expenditure, or income.

5. Product or Value Added Method

• Measures total value added by each product‑producing unit within the domestic territory during a year.
• To avoid double counting, only the value added at each stage is included.

Sum of GVA across all industries gives: GDP at Market Price.

6. Expenditure Method

• Calculates national income from the buyers’ side — total money spent on final goods and services.

• C – Private final consumption expenditure
• I – Investment or Gross Capital Formation
• G – Government final consumption expenditure
• X – M – Net exports (exports minus imports)

7. Income Method

• Measures income earned by all factors of production within the domestic territory.
• Components:
  • Compensation of Employees = Wages + Salaries + Employers’ contribution.
  • Operating Surplus = Rent + Interest + Profit of corporates.
  • Mixed Income = Earnings of self‑employed.

8. Factor Cost, Basic Price, and Market Price

• Different price concepts are used to express the same output value depending on tax and subsidy adjustments.

9. Macroeconomic Identities

These identities express the logical equivalence between output, income and expenditure flows in an economy.

where Y = National Income = National Output = National Expenditure.

10. National Income Aggregates and Conversions

Understanding relationships among different aggregates is essential for accurate calculation.

11. Nominal and Real GDP

Nominal GDP is measured at current prices, while Real GDP uses base‑year prices to remove effect of inflation.

Analysis:

• If Nominal GDP rises faster than Real GDP → price inflation.
• If Real GDP rises → actual productive expansion.

12. GDP and Welfare

While GDP measures output, it does not capture total human welfare. Higher GDP may coexist with inequality or pollution.

• Limitations of GDP as a welfare indicator:
• Ignores income distribution pattern.
• Excludes non‑market activities like household services.
• Does not account for environmental costs or leisure.
• Unrecorded illegal transactions omit real activity.

13. Limitations and Practical Difficulties

• Accurate data collection from informal sector is difficult.
• Valuing self‑consumed goods (e.g., farm produce) poses problems.
• Price changes distort inter‑year comparisons.
• Illegal and black‑market activities go unrecorded.

14. Numerical Applications and Practice

1. Given Wages = ₹2500, Rent = ₹800, Interest = ₹400, Profit = ₹300, Mixed Income = ₹500, find National Income.

2. Compute Real GDP: Nominal GDP ₹12 000, Price Index = 120 → (12000/120)×100 = ₹10 000.

15. Practical Application of National Income Data in India

• Government of India: Uses NI to frame development plans, budgets, and sectoral allocations.
• Reserve Bank of India (RBI): Employs GDP growth and inflation data to set monetary policy and interest rates.
• NITI Aayog: Analyses sectoral GDP and per‑capita income for policy recommendations and economic reforms.
• Central Statistics Office (CSO): Compiles and publishes annual and quarterly national accounts.
• Investors & Businesses: Rely on GDP trends to forecast demand and investment returns.

16. Summary Table of Key Formulas

17. Glossary of Key Terms

• Depreciation: Loss of value of capital assets due to wear and tear.
• Factor Income: Earnings from providing land, labour, capital, entrepreneurship.
• Transfer Payments: Incomes without doing productive work, e.g., pension.
• NFIA: Net Factor Income from Abroad = Factor income earned from abroad – paid to foreigners.
• Intermediate Goods: Inputs used for further production.
• Final Goods: Goods ready for final use by consumers or investors.
• GDP Deflator: Price index reflecting overall price change since base year.
• Per Capita Income: Average income per person = NI / Population.

18. Concluding Insights

National Income Accounting provides a quantitative picture of economic activity. It links production, income, and expenditure through a consistent framework used worldwide for policy analysis and international comparison.

However, interpreting GDP requires considering social and environmental indicators to truly assess well‑being.