NATIONAL INCOME ACCOUNTING (7 MAJOR CONCEPTS OF NATIONAL INCOME ACCOUNTING)

National income accounting is the set of principles and conventions that the government used for measuring economic activity in the aggregate economy.

It provides an important conceptual framework that macroeconomists used to gauge the economic performance of a country. 

National income is the systemic record of the various levels and types of economic activities.

The term "national income accounting'' was first mentioned by English economist Williams petty in 1676.

However,  after the breakdown of the second world war, another American economist Simon Kuznets developed a systematic approach to national income accounting. 

For this reason, Kuznets is regarded as "the father of modern income accounting".

National income accounting can also be defined as a method of preparing the national income of a country.

With national income accounting, we can measure and analyze how much a nation is producing and consuming.

We can, thus, conclude that national income accounts provide a quantified framework of an economy's spending, income, and output.

There are seven major concepts of national income accounting: These are Gross domestic product (GDP), Gross national product (GNP), Personal Income, Personal Disposable income, Net national income, net national product, and net domestic product.

Gross Domestic Product (GDP)

Gross means total. Domestic means are internal to a specific country. Product means commodity offered for sale.

Taken together, Gross domestic product is simply the total market value of final goods and services produced within a country at a given period.

GDP can either be measured using the expenditure approach or the income approach. 

Using the expenditure approach, GDP can be expressed mathematically as:

$Y=C+I+G+(X-M)$

      Where $C$ is Consumption

                  $I$ is Investment

                  $G$ is Government spending

                  $X-M$ is net export

Using the income approach, GDP is expressed as:

$GDP=TNI+T+D+NFFI–S$

Where TNI is the total national income 

                   T is the Indirect business tax

                   D is depreciation.

                  and S is a subsidy

Gross National Product (GDP)

GNP is the total income earned by a country's factor of production, regardless of where that factor of production is located. 

Gross National Product is the total market value of all goods and services produced by the citizens of a country, whether living domestically or abroad during a specified period.

It is the sum of GDP and net foreign factor income from abroad.

Net foreign factor income(NFFI) is the income from foreign domestic factors sources minus the foreign factor income earned domestically

Put in another way, Net factor income is the foreign income of our citizens less income of residents of our country who are not our citizens.

In the simplest term, GNP is represented as:

$GNP=GDP+NFFI$ 

National income

When measuring gross national product, economists conventionally uses the current market price. These market prices will reflect both subsidies and tax imposed on the goods and services produced. 

As everyone knows, Tax and subsidy is not a production. However, tax and subsidy are usually included as factor income even though they are not income payments to the factor of production.

To correct this flaw, economists have now developed a new term called "National income". National income is Net National Product (NNP) minus indirect business taxes, plus subsidy. That is,

$NI=NNP-IBT+S$

where:

NI is national income

NNP is a national product product

IBT is indirect business taxes

S is subsidy

Net National product

This is the total market value of all final goods and services produced by the citizens of a country with less capital consumption allowance (Depreciation).

Capital consumption allowance is just as it sounds. it is the allowance for capital goods consumed while producing the GDP of the current year.

The net national product can also be defined as the net market value of all final goods and services produces by a country national, both domestically and abroad. It is easily obtained by subtracting depreciation from the Gross national product. That is

$NNP=GNP-D$

For example, if a country produces 5 billion worth of goods and services and recorded a capital consumption allowance of 500 million, then Its net national product will be 4.5 billion.

Net Domestic product

This is the total market value of all final goods and services produced within the domestic territory of a country minus capital consumption allowance (depreciation).

It is the net value of all final goods and services produced domestically in an accounting year. It is expressed in symbols as

$NDP=GDP-D$

Personal income

According to the America bureau of economic analysis (BEA), "Personal income
is the total Income that people get from wages and salaries, Social Security and other government benefits, dividends and interest, business ownership, and other sources.

Personal income  can also be defined as the total of all current income received by households of a country from all sources before direct taxes

It is important to note here that some income earned by an individual may not be received. For instance, undistributed profits, social security contributions (or taxes), and corporate taxes paid by the enterprises. Moreover, personal incomes include not just factor incomes but transfer earning.

We can, therefore, say that personal income is Total national income minus corporate taxes, minus social security taxes, minus undistributed profit plus transfer earning. This can be expressed symbolically as:

$PI=TNI-T_c-P_C-S_T+T_P$ 

where:

TNI is the total national income

$T_c$ is corporate taxes

$P_c$ is undistributed corporate profit

$T_S$ is social security taxes

$T_P$ is transfer payment by the government

Personal disposable income

When you subtract personal current taxes, you get personal disposable income. More precisely, personal disposable income is the income that remains after every household in a country has paid their taxes and other compulsory payments to the government.

It can be taken to represent the total money available to people for savings and consumption after they have paid their taxes.

Mathematically, personal disposable income is

$PDI=PI-PT-M_G$

where

$PI$ is personal income

$PT$ is personal taxes.

$M_G$ is miscellaneous receipts of the government

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FINAL WORDS

Each concept of national income account has its unique importance.

For example, while GDP shows the economic performance of residents of a country, GNP tells you how much your country's citizens (Domestically and abroad) have contributed to the economy.

It is, therefore, important that each concept of national income accounting be treated as complementary and not mutually exclusive.

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