What is 'National Income Accounting?

National income accounting is a bookkeeping system that a national government uses to measure

the level of the country's economic activity in a given time period. Accounting records of this

nature include data regarding total revenues earned by domestic corporations, wages paid to

foreign and domestic workers, and the amount spent on sales and income taxes by corporations

and individuals residing in the country.

Three Approaches to measuring National Income

1. Product Method:

In this method, national income is measured as a flow of goods and services. We calculate

money value of all final goods and services produced in an economy during a year. Final goods

here refer to those goods which are directly consumed and not used in further production

process.

2. Income Method:

Under this method, national income is measured as a flow of factor incomes. There are generally

four factors of production labour, capital, land and entrepreneurship. Labour gets wages and

salaries, capital gets interest, land gets rent and entrepreneurship gets profit as their

remuneration.
Besides, there are some self-employed persons who employ their own labour and capital such as

doctors, advocates, CAs, etc. Their income is called mixed income. The sum-total of all these

factor incomes is called NDP at factor costs.

3. Expenditure Method:

In this method, national income is measured as a flow of expenditure. GDP is sum-total of

private consumption expenditure. Government consumption expenditure, gross capital formation

(Government and private) and net exports (Export-Import).

Product/ Value Added Method

The value added method/ product method is also known as the output method or inventory

method. In this method, the sum total of the gross value of the final goods and services in

different sectors of the economy like industry, service, agriculture, etc. is acquired for the current

year by determining the total production that was made during the specific time period. The

value obtained is the gross domestic product. Thus, according to this method,

GDP= Total product of (industry + service + agriculture) sector

Symbolically, GDP= ∑ (P × Q)

Where,

P= Market price of goods and services

Q= Total volume of Output

Sometimes goods produced by one sector is further processed by another sector. These goods are

termed as intermediate goods and are already included while determining the value of final

goods.

So, in order to avoid the problem of double counting of value of goods, the product method if

further categorized into two approaches:

The Final Goods Approach

In this method, only the value of final goods and services are computed while estimating GDP,

regardless of any intermediate goods and their processing. This method takes into account only

those goods and services that purchased and consumed by the final consumers in the economy.

The Value Added Method

In the value added method of measuring national income, the value of materials added by

producers at each stage of production to produce the final good is considered. The difference

between the value of output and inputs at each stage of production is the value added. Thus,

Value added= Value of output – Cost of intermediate goods

If the differences are added up for all production sectors in the economy, the value of GDP is

computed. The table below clearly explains this method:

 Value Added
Producers Stage of Production Selling Price (Rs.) Cost Price (Rs.)
(Rs.)

Importance of National income accounting:

1) It helps in policy making and planning.

2) It helps in understanding and evaluating the performance of the economy.

3) It helps in measuring inflation and deflation changes.

4) It helps in comparing the standard of living

As per investorwords.com, GDP is the "total market value of all final goods and services produced in a

country in a given year.

1. Economic Policy

2. Economic Planning

3. Economy’s Structure

4. Inflationary and Deflationary Gaps

5. Budgetary Policies

6. National Expenditure

7. Distribution of Grants-in-aid and Others.