National Income Accounting

1. National Income Accounting Presenter Md. Zahangir Alam Assistant Professor of Finance Dept. of Business Administration International Islamic University Chittagong

2. National Income Accounts • The set of rules and techniques used for measuring the total flow of output (goods and services) produced and the total flow of incomes generated by this production. • National income accounts of a country compile the data on aggregate economic activity in the country.

3. Gross Domestic Product The monetary value of all the finished goods and services produced within a country's borders in a specific time period. where Qi and Pi are respectively the quantity of output and market price of Good i and n is the number of goods produced in the economy.

4. Excluded Products • Nonmarket Products: Home cooking, baby sitting, serving and helping other members of the household. • No Intermediate Goods • Bads and Resource Depletion : Environmental pollution, water contamination and resource depletion. • Illegal Goods

5. Nominal Vs. Real GDP, and GDP Deflator • Real GDP is inflation adjusted, whereas nominal GDP is not. • GDP Deflator • It is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. • It is a measure of price inflation/deflation with respect to a specific base year; the GDP deflator of the base year itself is equal to 100.

6. It is not based on a fixed basket  of goods and services; the "basket" for the GDP deflator is allowed to change from year to year with people's consumption and investment patterns GDP Deflator = (Nominal GDP/Real GDP)* 100

7. Gross National Product • It is the market value of all goods, services, and structures produced in a given time period with labor and property supplied by a country, regardless of where the resources are located. • It is similar to GDP except that the GDP includes only goods produced within the territory of the country, irrespective of the nationality of the producer, whereas GNP accounts for goods produced by the nationals of the country, irrespective of the territory where those goods are produced.

8. GNP = GDP+ Factor Payments From Abroad - Factor Payments to Abroad

9. Four Sectors in a Typical Economy • Household Sector • Buys consumption goods from the business sector, and supplies labor and capital inputs (through savings). • Business Sector • Produces products using capital and labor inputs and sells them to consumers. • Financial sector is part of the business sector: it receives savings from the household sector and lends money to business firms.

10. Government sector • The government collects taxes and spends the revenue. • Redistributes income, supposedly from the poor torich to stabilize the society. • When income distribution is unequal, there is a higher chance of a revolution or overthrow of the government.

11. Foreign sector • The foreign sector buys domestic products and supplies foreign products to domestic consumers.

13. Methods of Accounting GDP • The Expenditures Approach Itadds up expenditures of all the four sectors of the economy made on buying domestically produced final goods and services, which are • personal consumption expenditures of households (C) • gross private investment expenditures of businesses (I) • government expenditures or spending (G) • net export expenditures of the foreigners (NX) GDP=C+I+G+NX

14. Resource Cost - Income Approach of Accounting GDP Computation of GDP from the incomes of the resource owners or the resource costs of the producers is called the “resource cost-income approach” of accounting GDP.

15. GDP = Wages And Salaries or Compensation Paid to Employees + Proprietors’ Income + Rental Payments + Corporate Profits + Interest Payments + Depreciation Cost + Indirect Business Taxes - Net Income Earned Abroad

16. Per-Capita GDP It is the average GDP per person, which is a measure of average value of goods and services available to a citizen to enjoy.

17. Problems with GDP as a Measure of Welfare • It only accounts for goods produced through market or formal organized production activities. • It does not include goods produced in households or informal sectors and in black markets or underground economic activities. • It does not account for leisure. • It does not account for changes in quality of life. • It also does not account for changes in quality of goods produced.

18. Net Domestic Product and Net National Product • NDP is the amount of output actually available for utilization calculated by deducting the depreciation cost from GDP. NDP = GDP – Depreciation Cost • NNP is the amount which is obtained by deducting depreciation from. NNP = GNP – Depreciation Cost

19. National Income • It is the measure of income earned by households of an economy in the form of wages, rents, profits, and interest, regardless of whether they earn those incomes domestically or abroad. • To obtain the measure of national income, deduct depreciation and indirect business taxes from GNP. National Income = GNP – Depreciation Cost – Indirect Business Taxes

20. Personal Income • Personal income of households is the national income minus corporate and social security taxes that are deducted from paychecks, plus any income transfers to the households from the government. • It is the total income received by households and available to them for consumption, saving, and payment of personal taxes. Personal Income = National Income – Corporate and social security taxes + income transfers from the government

21. Disposable Income This is the amount of income actually available to households to spend any way they please. Disposable Income = Personal Income – Personal Taxes

22. Business Cycle • The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.