Module C

NATIONAL INCOME ACCOUNT

Overview on Macroeconomics; Macroeconomic Goal, Policies and Accounts

Macroeconomic Accounts: National Income Account, Fiscal Account, Monetary Account
and BOP Account. Macroeconomic Policies and their Interactions

7.1 NATIONAL INCOME

National income is a measure of the total value of the goods and services (output) produced by an economy
over a period of time (normally a year). It is also a measure of the income flown from production, and/or the
sum total of all the spending involved for the production of output. The following are some of the notable
definitions.
Alfred Marshal : The labour and capital of the country acting on its natural resources produce annually a
certain net aggregate of commodities, material and immaterial, including services of all kinds This is the net
annual income or revenue of the country, or the national dividend.
Irving Fisher: The national dividend or income consists solely of services as received by ultimate consumers,
whether from their material or from their human environment.
National Income Committee of Bangladesh,: National income estimate measures the volume of commodities
and services turned out during a given period counted without duplication.
Paul A. Samuelson: Gross national product (GNP) is the most comprehensive measure of a nations total
output of goods and services. It is the sum of the dollar (money) value of consumption, gross investment,
government purchase of goods and services and net exports.
Though there are some variations among these definitions, the basic idea is very clear national income is
simply the income of the whole nation. The basic concepts will help to understand it more precisely.

7.2 BASIC CONCEPTS

Gross National Product
Gross National Product (GNP) is the total value of output (goods and services) produced and income received
in a year by domestic residents of a country. It includes profits earned from capital invested abroad.

Gros s Domestic Product

Gross Domestic Product (GDP) is the total value of output (goods and services) produced by the factors of
production located within the countrys boundary in a year. The factors of production may be owned by any one
citizens or foreigners.
GNP Net income earned from abroad = GDP
Thus, GDP measures income from where it is earned rather than who owns the factors of production.

Net National Product

Net National Product (NNP) is arrived at by making some adjustment, with regard to depreciation, in GNP. As
noted above, GNP is the total value of output produced and income received in a year by domestic residents of a
country. Over this one year period, the available plant and machinery (capital) will wear and tear and get
condemned. Such decline in the capital assets due to wear and tear is measured as capital depreciation.
NNP is arrived at by deducting value of such depreciation from GNP.
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That is GNP Depreciation = NNP

Net Domestic Product

Net domestic product (NDP) is also arrived from GDP by making adjustment with regard to depreciation in the
same way described above. (NDP is calculated by deducting depreciation from GDP).
GDP Depreciation = NDP

Per Capita Income

Per capita income (or) output per person is an indicator to show the living standards of people in a country. If
real PCI increases, it is considered to be an improvement in the overall living standard of people. PCI is arrived
at by dividing the GDP by the size of population. It is also arrived by making some adjustment with GDP.

GDP and GNP

While GDP indicates productive capacity of an economy, GNP is a crude indicator for living standard. The
significance of the distinction between GNP and GDP depends on the nature of a particular economy. For
instance, if a country has more non-resident inflows and produces a considerable portion of its output by
multinational corporations (i.e. with the help of external factors of production), its GNP will be higher than
GDP. Otherwise the distinction will be negligible.
Many countries have foreign firms. In the case of US Ford Motors in Chennai, the income from the car factory
would be counted as Bangladeshn GDP and not as US GDP. But the amount of profit the company sends to US
will be added to their GNP. Similarly, our GNP can be arrived by adding to our GDP the net factor income
receipts from abroad for the factor inputs owned by Bangladeshns. That is, the non-resident Bangladeshns
income will be added to GDP to arrive at our GNP.
The concepts of national income discussed above can be measured either at current price or at constant price.
The measure based on current price uses the ongoing market prices to compute the value of output. It is quite
possible that the current price may always be higher than real value due to many factors like taxes and inflation
(or rising prices). Hence, national income arrived at current price includes such influences as inflation and
taxes.
With inflation as a common feature in almost all the economies, it is necessary to measure the national income
after deducting any such increase in the value of any output or income. National income at constant price
measures the national income after making necessary adjustment to eliminate the effect of inflation. Thus it is
based on unchanged price of output. As the national income at constant price is computed based on the real
worth of the purchasing power of income, it is also called as real national income or national income in real
terms.

7.3 NEED FOR THE STUDY OF NATIONAL INCOME

A national income measure serves various purposes regarding economy, production, trade, consumption, policy
formulation, etc. The following are some such needs.
1. To measure the size of the economy and level of countrys economic performance.
2. To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other
countries.
3. To know the structure and composition of the national income in terms of various sectors and the periodical
variations in them.
4. To make projection about the future development trend of the economy.
5. To help government formulate suitable development plans and policies to increase growth rates.
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6. To fix various development targets for different sectors of the economy on the basis of the earlier
performance.
7. To help business firms in forecasting future demand for their products.
8. To make international comparison of peoples living standards.

7.4 CIRCULAR FLOW OF INCOME

Before discussing the calculation of national income, a brief introduction of the circular flow of income would
be helpful. The circular flow of income is explained with a simplest model consisting business (firms or
producers) and public (households or consumers). The public own the productive resources (i.e. factors of
production namely land, labour and capital). Business sector or producers employ the factors of production to
produce the goods and services. Such goods and services are bought by the public.
Thus public own the factors of production and provide them to producers. The producers employ the factor
inputs to produce output of goods and services, which is bought by the consumers (public). For the employment
of factor services, the public receive the factor income namely rent (for land), wages (for labour) and interest
(for capital). This income flows back from the public to the business sector as consumption expenditure to buy
the goods and services.
Thus, the flow chart consist two segments real flow and money flow. As the outer flow in Figure 4.1 shows
the flow of input (factors viz. land, labour, capital and organisation) and output (goods and services), they
represent the real economy (or real flow). The inner flow shows the money received as factor income (rent,
wage, interest, and profit) and it goes to the producer as consumption expenditure (commodity price) to buy the
goods and services. As this flow chart involves only income received and expenditure made in terms of money,
it represents the money economy (or money flow).
Figure 4. 1 Circular Flow of Two Sectors
Payment for Factor Services
(Rent, Wages, Interest and Profit)

Payment for Commodities

(Commodity Price)

The most important point to be noted for the computation of national income is that income (Y) received is
equal to the consumption expenditure (C) made by the consumers, i.e. Y=C.
This simple circular flow model is explained without the other components of national income namely savings
or investment (I), public expenditure by government (G) and expenditure on net exports (X-M). If we include
all the above components of national income Y= C will become Y = C + I + G + (X-M)
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Thus national income is the aggregate summation of income or expenditure made through these four
components, consumers (C ), investors (I), government (G) and foreign trade (Exports [X] Imports [M] )

7.5 METHODS OF CALCULATING NATIONAL INCOME

There are three different methods of calculating national income.

They are
1. Product or Output Method
2. Income Method
3. Expenditure Method
As noted above, GDP is the measure of an economys total output. It is also used as a measure of total income
and total expenditure in that economy. Figure 4.1 clearly shows that factor incomes received by the public
is being spent to buy the output of goods and services produced. Hence, income is equal to expenditure and
expenditure is equal to the value of output produced in the economy.
Income = expenditure = output
Y=E=O
The model can further be extended by adding the other components of national income namely investment (I),
government (G), and foreign trade (X-M). In the extended model, savings of public, taxes and import payments
will be deducted from the income. Hence, they are called leakages from the circular flow. Similarly, investment
expenditure, government expenditure and net expenditure on trade will be added in to the circular flow. These
additions are called injections. However, after aggregating all leakages (outflow) and injections (inflow) in any
one year, the total income components of the economy will be equivalent to the total expenditure or total output.
Therefore, all the three methods are supposed to give same results.

1. Output or Product Method

In the output or product method, the measures of GDP are calculated by adding the total value of the output (of
goods and services) produced by all activities during any time period, such as a year. The major challenge of
this method is the problem of double-counting.
The output of many businesses is the inputs of some other businesses. For example, the output of the tyre
industry is the input of racing bike industry. Counting the final output of both industries will result in double-
counting of the value of tyre. This problem can be avoided by including only the value added at each stage of
production or by adding only the final value of output produced.

2. Income Method
In the income method, the measures of GDP are calculated by adding all the income earned by various factors
of production which are engaged in the production of output. The various incomes included to compute the
gross national income are:
Wages and salaries
Income of self-employed
Profits and dividends of business corporations
Interest
Rent
Surplus of government enterprises
Net flow of income from abroad
All of them are known as factor incomes and they are paid in return for the inputs engaged in some productive
process which have resulted in corresponding output. The sum of all these incomes (or factor prices ) provide us
the measure of national income.

3. Expenditure Method
In the expenditure method, the measures of GDP are calculated by adding all the expenditures made in the
economy. The essential components of expenditure are:
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C = consumption expenditures
I = domestic investment
G = government expenditures
X = exports of goods and services
M = imports of goods and services
NR = net income receipts from assets abroad
The sum of all these aggregate expenditure provides us the measure of national income.
GDP = E = C + I + G + (X-M)
where E is aggregate expenditure.
All the above three methods must yield the same results because the total expenditures on output must by
definition be equal to the value of the output produced which must be equal to the total income paid to the
factors that produced these goods and services. However, in practice, there will be minor differences between
these results due to changes in inventory levels and timing discrepancies. The following are some of the
national income identities.
NNP = GNP - Depreciation
NNI = NNP -Indirect taxes
PI = NNI - Retained earnings, corporate taxes and interest on public debt
PDI = PI - Personal taxes.
Where, GNP Gross National Product
NNP - Net National Product
NNI - Net National Income
PI - Personal Income
PDI - Personal Disposable Income

7.6 PROBLEMS IN CALCULATING NATIONAL INCOME

The measurement of national income encounters many problems. The problem of double-counting has already
bee noted. Though there are some corrective measures, it is difficult to eliminate double-counting altogether.
And there are many such problems and the following are some of them.

Black Money
In countries where level of illegal activities, illegal businesses and the level of corruption are very high, the
circulation of black money is so high, it has created a parallel economy. It means unreported economy which
is equivalent to the size of officially estimated size of the economy. GDP does not take into account the parallel
economy as the transactions of black money are not registered. In Bangladesh, black money is all-pervasive,
affecting not only the economy but also the society at large. The black economy as percentage of GDP is
estimated to have grown from about 3 percent in the mid-fifties to 40 per cent by 1995-96.

Non-Monetization
In most of the rural economy, considerable portion of transactions occurs informally and they are called as non-
monetized economy. The presence of such non-monetary economy in developing countries keeps the GDP
estimates at lower level than the actual.

Growing Service Sector

In recent years, the service sector is growing faster than that of the agricultural and industrial sectors. Many new
services like business process outsourcing (BPO) have come up. However, value addition in legal consultancy,
health services, financial and business services and the service sector as a whole is not based on accurate
reporting and hence underestimated in national income measures.

Household Services
6 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
The national income analysis ignores domestic work, and housekeeping and social services. Most of such
valuable work rendered by our women at home does not enter our national accounting.
Social Services
It ignores volunteer and unpaid social services. For example, the wonderful services of Mother Teresa is
invaluable for millions of poor, destitute, orphans and the diseased but at the same time not included in our
GDP.

Environmental Cost
National income estimation does not distinguish between environmental-friendly and environmental-hazardous
industries. The cost of polluting industries is not included in the estimate.

7.7 NATIONAL INCOME SERIES IN BANGLADESH

The value for Gross national income (constant LCU) in Bangladesh was 3,945,340,000,000
as of 2011. As the graph below shows, over the past 30 years this indicator reached a
maximum value of 3,945,340,000,000 in 2011 and a minimum value of 928,491,000,000 in
1981.
Year Value Year Value

1981 928,491,000,000 1996 1,712,780,000,000

1982 953,114,000,000 1997 1,798,080,000,000

1983 1,003,920,000,000 1998 1,895,930,000,000

1984 1,034,860,000,000 1999 1,985,070,000,000

1985 1,078,630,000,000 2000 2,104,210,000,000

1986 1,128,740,000,000 2001 2,194,820,000,000

1987 1,176,140,000,000 2002 2,305,710,000,000

1988 1,200,800,000,000 2003 2,434,170,000,000

1989 1,233,260,000,000 2004 2,585,320,000,000

1990 1,300,630,000,000 2005 2,727,400,000,000

1991 1,349,790,000,000 2006 2,925,530,000,000

1992 1,405,100,000,000 2007 3,140,340,000,000

1993 1,494,460,000,000 2008 3,309,960,000,000

1994 1,551,230,000,000 2009 3,522,130,000,000

1995 1,638,330,000,000 2010 3,754,710,000,000

1996 1,712,780,000,000 2011 3,945,340,000,000

 Module A: Concepts of Economics and Demand Supply Analysis 7

Definition: Gross national income is derived as the sum of GNP and the terms of trade adjustment. Data are in
constant local currency.
Source: World Bank national accounts

7.8 BANGLADESH GDP PER CAPITA

The economy of Bangladesh is a rapidly developing market-based economy. Its per capita income in 2012 was
estimated to be US$2,100 (adjusted bypurchasing power parity). According to the International Monetary Fund,
Bangladesh ranked as the 44th largest economy in the world in 2012 in PPP terms and 57th largest in nominal
terms with a gross domestic product of US$306 billion in PPP terms and US$153.6 billion in nominal terms.
The economy has grown at the rate of 6-7% per annum over the past few years. The growth potential of the
economy has led to Bangladesh's inclusion in the Next Eleven (N-11) of Goldman Sachs and the Global Growth
Generators countries. More than half of the GDP is generated by the service sector; while nearly half of
Bangladeshis are employed in the agriculture sector. Other goods produced are textiles, jute, fish, vegetables,
fruit, leather and leather goods, ceramics, ready-made goods.

Exports of textiles and garments are the largest source of foreign exchange earnings. Shipbuilding,
pharmaceuticals and consumer goods manufacturing are important emerging industries, while the jute sector is
re-emerging with increasing global demand for green fibres. Remittances from Bangladeshis working overseas,
mainly in the Middle East, are another major source of foreign exchange earnings. Other important export
sectors include fish and seafood, ceramics, cement, fertilizer, leather and leather goods, food products, software
and IT services. Bangladesh has also made major strides in its human development index.

The land is devoted mainly to rice and jute cultivation as well as fruits and other produce,
although wheat production has increased in recent years; the country is largely self-sufficient in rice production.
[14][14]
The country's tea-growing regions, located in the eastern divisions of Sylhet and Chittagong, are among
8 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY

the major tea producing-areas of the world. Bangladesh's growth of its agricultural industries is due to its fertile
deltaic land that depend on its six seasons and multiple harvests.

Transportation, communication, water distribution, and energy infrastructure are rapidly developing.
[14]
Bangladesh is limited in its reserves of oil, but recently there has been huge development in gas and coal
mining. The service sector has expanded rapidly during last two decades and the country's industrial base
remains very positive.[14] The country's main endowments include its vast human resource base, rich agricultural
land, relatively abundant water, substantial reserves of natural gas and coal, major seaports
at Chittagong and Mongla, and its central strategic location at the crossroads of the two large burgeoning
economic hub groups of SAARC and ASEAN. According to a 2012 projection by HSBC, Bangladesh will be
the world's 31st largest economy in 2050 when ranked by total gross domestic product (GDP) and 89th when
ranked by GDP per capita.

Statistics
GDP $153.6 billion [(nominal) 43rd; 2012 est.]
$347 billion [(PPP) 33rd; 2012 est.]
GDP growth 6.7% (2013 est.)
GDP per capita $1,044 (nominal: 150th; 2013)
$2,210 (PPP" 145th; 2013 est.)
GDP by sector Agriculture: 17.3%, industry: 28.6%, services: 54.1% (2012 est.)

Source: IMF. Retrieved August 20, 2013.