📘 Chapter 2: National Income Accounting (Detailed Notes)

1. Introduction

• The study of National Income Accounting helps us measure the economic performance of a country.

• It is also called Macroeconomic Accounting.

• Objective: to know the total production, income, and expenditure of an economy.

2. Some Basic Concepts

1. Domestic Territory:

   • Includes political frontiers, airspace, territorial waters, embassies/consulates abroad.

   • Excludes foreign embassies in India.

2. Normal Resident:

   • A person or institution ordinarily living in a country for more than one year.

   • Excludes tourists, foreign diplomats, NRIs.

3. Factor Income vs Transfer Income:

   • Factor Income: Earned in return for services (wages, rent, interest, profit).

   • Transfer Income: Received without providing services (pensions, gifts, subsidies).

3. Methods of Measuring National Income

(a) Value Added Method (Production Method)

• Add value added at each stage of production.

• Formula:

  $$ValueAdded=ValueofOutput-IntermediateConsumption$$

• NI = Σ Value Added by all firms + Net Factor Income from Abroad (NFIA) – Depreciation – Indirect Taxes + Subsidies.

(b) Income Method

• NI = Sum of factor incomes (earned by normal residents).

• Includes:

  • Compensation of employees (wages, salaries, employer contributions).

  • Rent.

  • Interest.

  • Profit.

• Excludes: transfer incomes, illegal incomes, windfall gains.

(c) Expenditure Method

• NI = Sum of final expenditures.

• Formula:

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

  where

  • C = Private Final Consumption Expenditure

  • I = Gross Domestic Capital Formation (Investment)

  • G = Government Final Consumption Expenditure

  • (X–M) = Net Exports

4. Important National Income Aggregates

1. GDP at Market Price (GDPMP):

   • Market value of goods/services produced within domestic territory.

2. GNP at Market Price (GNPMP):

   • GDPMP + NFIA (Net Factor Income from Abroad).

3. NDP at Market Price (NDPMP):

   • GDPMP – Depreciation.

4. NNP at Market Price (NNPMP):

   • GNPMP – Depreciation.

5. NNP at Factor Cost (NNPFC) → National Income:

   • NNPMP – Indirect Taxes + Subsidies.

5. Per Capita Income

PCI=National IncomePopulationPCI = \frac{National \, Income}{Population}PCI=PopulationNationalIncome​

• Measures average income per person.

6. Real vs Nominal GDP

• Nominal GDP: At current prices.

• Real GDP: At constant prices (adjusted for inflation).

• GDP Deflator:

  Nominal GDPReal GDP×100\frac{Nominal \, GDP}{Real \, GDP} \times 100RealGDPNominalGDP​×100

7. Importance of NI Accounting

• Helps in economic planning.

• Measures growth & development.

• Basis of welfare comparison across nations.

• Identifies structural problems (like unemployment, low per capita income).