1.1 National Income Accounting

Chapter 1
Determination of
National Income
- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

Important
Links
Click on the icons of social media on tree to
connect with CA Mayank Kothari for latest
Updates & Videos
YouTube and Telegram is important.
If any of the link doesn’t work, try searching CA Mayank Kothari in respective platform.
Download Notes for Other Chapters
Chapter 1
Determination of
National Income
- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconn

Determination of
National Income
National Income
The Keynesian Theory
Accounting

When we undertake the study ofnational economies, we
are interested in macroeconomic aggregates
Consumption
Output
Prices
Income
Investment
Employment
Savings

National Income is defined as the net value of
all economic goods and services produced
within the domestic territory of a country in an
accounting year plus the net factor income
from abroad.

According to the Central Statistical Organisation
(CSO) ‘National income is the sum total of factor
incomes generated by the normal residents of a
country in the form of wages, rent , interest and profit
in an accounting year’.

National Income Accounting
1 Introduction
2 Usefulness and Significance of National Income Estimates
3 Different Concepts of National Income
4 Measurement of National Income in India
5 The system of Regional Accounts in India
6 Limitations and Challenges of National Income Computation

The Level of National Income National Income Statistics
Distribution Pattern of National International Comparison of

Income National Income
Economic Welfare Policies for Growth and Inflation
National Income in terms of

Economic Forecasting
Different Sectors

The Level of National Income
National income accounts provide a comprehensive, conceptual and

accounting framework for analyzing and evaluating the short-run
performance of an economy.
The level of national income indicates the level of economic activity and
economic development as well as aggregate demand for goods and
services of a country.

Distribution Pattern of National
Income
The distribution pattern of national income determines the pattern of

demand for goods and services and enables businesses to forecast the
future demand for their products.

Economic Welfare
Economic welfare depends to a considerable degree on the magnitude and

distribution of national income, size of per capita income and the growth of
these over time.

National Income in terms of
Different Sectors
The estimates of national income show the composition and structure of

national income in terms of different sectors of the economy, the periodical
variations in them and the broad sectoral shifts in an economy over time.
It is also possible to make temporal and spatial comparisons of the trend

and speed of economic progress and development.
Using these information, the governments can fix various sector-specific

development targets for different sectors of the economy and formulate
suitable development plans and policies to increase growth rates.

National Income Statistics
National income statistics also provide a quantitative basis for

macroeconomic modeling and analysis, for assessing and choosing
economic policies and for objective statement as well as evaluation of
governments’ economic policies.
These figures often influence popular and political judgments about the
relative success of economic programmes.

International Comparison of
National Income
International comparisons in respect of incomes and living standards assist

in determining eligibility for loans, and or other funds or conditions on
which such loans, and/ or funds are made available.
The national income data are also useful to determine the share of nation’s
contributions to various international bodies.

Policies for Growth and Inflation
Combined with financial and monetary data, national income data provide a
guide to make policies for growth and inflation.

Economic Forecasting
National income or a relevant component of it is an indispensable variable

considered in economic forecasting and to make projections about the
future development trends of the economy.

1 The Level of National Income 5 National Income Statistics

2 6
3 Economic Welfare 7 Policies for Growth and Inflation
4 National Income in terms of

8 Economic Forecasting
Different Sectors

1 Introduction

When we undertake the study of national economies, we
are interested in macroeconomic aggregates
Consumption
Output
Prices
Income
Investment
Employment
Savings
- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in Revision

1 The Level of National Income 5 National Income Statistics

2 6
3 Economic Welfare 7 Policies for Growth and Inflation
4 National Income in terms of

8 Economic Forecasting
Different Sectors
- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in Revision

1 Gross Domestic Product
Gross domestic product (GDP) is a measure of the market value of all final economic
goods and services, gross of depreciation, produced within the domestic territory of a
country during a given time period.

Gross domestic product (GDP) is a measure of the market value of all
final economic goods and services, gross of depreciation, produced
within the domestic territory of a country during a given time period.
It is the sum total of ‘value added’ by all producing units in the domestic
territory and includes value added by current production by foreign
residents or foreign-owned firms.
The term ‘gross’ implies that GDP is measured ‘gross’ of depreciation.

‘Domestic’ means domestic territory or resident production units.
However, GDP excludes transfer payments, financial transactions and

non- reported output generated through illegal transactions such as
narcotics and gambling (these are also known as ‘bads’ as opposed to
goods which GDP accounts for).

Gross Domestic Product
1. Value Added only becomes part of GDP
2. Intermediate Goods are excluded
3. All goods of Production Boundary
4. Economic Activities
5. Only Output of a time period is considered
6. 2 Types - Capital Goods & Investment Inventory

While learning about national income, there are a few important points which one needs to
bear in mind:
1. The value of only final goods and services or only the value added by the production
process would be included in GDP. By ‘value added’ we mean the diﬀerence between
value of output and purchase of intermediate goods. Value added represents the
contribution of labour and capital to the production process.
2. Intermediate consumption consists of the value of the goods and services consumed as
inputs by a process of production, excluding fixed assets whose consumption is
recorded as consumption of fixed capital. Intermediate goods used to produce other
goods rather than being sold to final purchasers are not counted as it would involve
double counting. The intermediate goods or services may be either transformed or used
up by the production process. For example, the value of flour used in making bread
would not be counted as it will be included while bread is counted. This is because flour
is an intermediate good in bread making process. Similarly, if we include the value of an
automobile in GDP, we should not be including the value of the tyres separately.
3. Gross Domestic Product (GDP) is a measure of production activity. GDP covers all
production activities recognized by SNA called the ‘production boundary’. The
production boundary covers production of almost all goods and services classified in the
National Industrial Classification (NIC). Production of agriculture, forestry and fishing
which are used for own consumption of producers is also included in the production
boundary.

4. Economic activities, as distinguished from non-economic activities, include all human
activities which create goods and services that are exchanged in a market and valued at
market price. Non-economic activities are those which produce goods and services, but
since these are not exchanged in a market transaction they do not command any market
value; for e.g. hobbies, housekeeping and child rearing services of home makers and
services of family members that are done out of love and aﬀection.
5. National income is a ‘flow’ measure of output per time period—for example, per year—
and includes only those goods and services produced in the current period i.e. produced
during the time interval under consideration. The value of market transactions such as
exchange of goods which already exist or are previously produced, do not enter into the
calculation of national income. Therefore, the value of assets such as stocks and bonds
which are exchanged during the pertinent period are not included in national income as
these do not directly involve current production of goods and services. However, the value
of services that accompany the sale and purchase (e.g. fees paid to real estate agents and
lawyers) represent current production and, therefore, is included in national income.
6. An important point to remember is that two types of goods used in the production
process are counted in GDP namely, capital goods (business plant and equipment
purchases) and inventory investment—the net change in inventories of final goods awaiting
sale or of materials used in the production which may be positive or negative. Additions to
inventory stocks of final goods and materials belong to GDP because they are currently
produced output.

Nominal GDP
Real GDP

-NIDT
NNP FC -Depreciation GNP FC -NIDT GNP MP -Depreciation

NNP MP
- CA Mayank Kothari
+NFIA +NFIA +NFIA +NFIA
NDP FC -Depreciation GDP FC -NIDT GDP MP -Depreciation NDP MP
-NIDT

Gross domestic product (GDP) is a measure of the market value of all final economic
country during a given time period.

2 Gross National Product
Gross National Product (GNP) is a measure of the market value of all final economic
country by normal residents during an accounting year including net factor incomes
from abroad. Gross National Product (GNP) is evaluated at market prices and therefore
it is in fact Gross National Product at market prices (GNP MP).

Per Capita Income
Per capita income (PCI) or average income measures the

average income earned per person in a given area (city, region,
country, etc.) in a specified year. It is calculated by dividing the
area's total income by its total population.

Personal Income
In economics, personal income refers to an individual's total

earnings from wages, investment enterprises, and other
ventures. It is the sum of all the incomes received by all the
individuals or household during a given period. Personal
income is that income which is received by the individuals or
households in a country during the year from all sources.

1 Introduction

Circular Flow of Income
Production of
Goods & Services
Distribution as
Consumption / Factor Income
Investment

1. In the production phase, firms produce goods and services with the
help of factor services.
2. In the income or distribution phase, the flow of factor incomes in
the form of rent, wages, interest and profits from firms to the
households occurs.
3. In the expenditure or disposition phase, the income received by
different factors of production is spent on consumption goods and
services and investment goods. This expenditure leads to further
production of goods and services and sustains the circular flow.

Product Method

Income Method
Production is carried out by the combined effort of all factors of

production. The factors are paid factor incomes for the services
rendered. In other words, whatever is produced by a producing unit is
distributed among the factors of production for their services.
Under Factor Income Method, also called Factor Payment Method or

Distributed Share Method, national income is calculated by
summation of factor incomes paid out by all production units within the
domestic territory of a country as wages and salaries, rent, interest,
and profit. By definition, it includes factor payments to both residents
and non- residents.

Only incomes earned by owners of primary factors of production are included in national
income.
Transfer incomes are excluded from national income. Thus, while wages of labourers will be
included, pensions of retired workers will be excluded from national income.
Labour income includes, apart from wages and salaries bonus, commission, employers’
contribution to provident fund and compensations in kind. Non-labour income includes
dividends, undistributed profits of corporations before taxes, interest, rent, royalties and profits
of unincorporated enterprises and of government enterprises.
However, normally, it is difficult to separate labour income from capital income because in
many instances people provide both labour and capital services.
Such is the case with self-employed people like lawyers, engineers, traders, proprietors etc. In
economies where subsistence production and small commodity production is dominant, most
of the incomes of people would be of mixed type.
In sectors such as agriculture, trade, transport etc. in underdeveloped countries (including

India), it is difficult to differentiate between the labour element and the capital element of
incomes of the people. In order to overcome this difficulty a new category of incomes, called
‘mixed income’ is introduced which includes all those incomes which are difficult to separate.

Product Method Income Method Expenditure Method

Expenditure Method
Final
National Gross Domestic Net
Consumption
Income Capital Formation Exports
Expenditure

Final Consumption Expenditure
Private Government
Final Consumption Expenditure Final Consumption Expenditure
To measure this, the volume of final sales of goods and services to consumer
households and nonprofit institutions serving households acquired for consumption (not
for use in production) are multiplied by market prices and then summation is done.
It also includes the value of primary products which are produced for own consumption
by the households, payments for domestic services which one household renders to
another, the net expenditure on foreign financial assets or net foreign investment. Land
and residential buildings purchased or constructed by households are not part of PFCE.
They are included in gross capital formation. Thus, only expenditure on final goods and
services produced in the period for which national income is to be measured and net
foreign investment are included in the expenditure method of calculating national
income.

Final Consumption Expenditure
Private Government
Final Consumption Expenditure Final Consumption Expenditure
Since the collective services provided by the governments such as defence,

education, healthcare etc are not sold in the market, the only way they can be
valued in money terms is by adding up the money spent by the government in the
production of these services.
This total expenditure is treated as consumption expenditure of the government.

Government expenditure on pensions, scholarships, unemployment allowance etc.
should be excluded because these are transfer payments.

Gross Domestic
Capital Formation
Gross domestic fixed capital formation includes final expenditure on

machinery and equipment and
own account production of machinery and equipments,
expenditure on construction,
expenditure on changes in inventories, and
expenditure on the acquisition of valuables such as, jewellery and works
of art.

Net Exports = Exports - Imports

1 Introduction

Regional accounts provide an integrated database on the innumerable transactions taking place in the
regional economy and help decision making at the regional level.
At present, practically all the states and union territories of India compute state income estimates and
district level estimates.
State Income or Net State Domestic Product (NSDP) is a measure in monetary terms of the volume of all
goods and services produced in the state within a given period of time (generally a year) accounted without
duplication.
Per Capita State Income is obtained by dividing the NSDP (State Income) by the midyear projected
population of the state.
The state level estimates are prepared by the State Income Units of the respective State Directorates of
Economics and Statistics (DESs).
The Central Statistical Organisation assists the States in the preparation of these estimates by rendering
advice on conceptual and methodological problems.
In the preparation of state income estimates, certain activities such as are railways, communications,
banking and insurance and central government administration, that cut across state boundaries, and thus
their economic contribution cannot be assigned to any one state directly are known as the ‘Supra-regional
sectors’ of the economy.
The estimates for these supra regional activities are compiled for the economy as a whole and allocated to
the states on the basis of relevant indicators.

Limitations
GDP
GDPper
Percapita
Capita is inadqueate measure of welfare
Production
Production hidden
Hidden from government authorities
Non Production and Non Economic

Production hidden from governme. to well-being
Contributors
Dis-utility of loss of leisure time
Economics Bads for example crime, traffic, pollution
Productions that Prevents us from becoming worse

Challenges
1 Lack of an agreed definition of national income
2 accurate distinction between final goods and intermediate goods,
3 issue of transfer payments,
4 services of durable goods,
5 difficulty of incorporating distribution of income
6 valuation of a new goods at constant prices, and

Challenges
7 valuation of government services
8 Inadequacy of data and lack of reliability of available data,
9 presence of non-monetised sector,
10 production for self-consumption,,
11 absence of recording of incomes due to illiteracy and ignorance,
12 accurate estimation of consumption of fixed capital

Challenges
1 Definition 7 Government Services
2 Final & Intermediate Goods 8 Data
3 Transfer Payments 9 Non Monetised Sector
4 Durable Goods 10 Self Consumption
5 Dustribution of Income 11 Illiteracy & Ignorance
6 New Goods 12 Fixed Capital

1 Introduction

THANK YOU
Chapter 1: Determination of National Income
To watch the videos tap the respective unit | Video Lectures at www.caconnect.in
CA Inter | Economics | Paper 8 |
Unit I Unit II Revision Videos by CA Mayank Kothari
NATIONAL INCOME THE KEYNESIAN
ACCOUNTING THEORY
Chapter 2: Public Finance
Unit I Unit I Unit III Unit IV

GOVERNMENT
FISCAL INTERVENTION TO
MARKET FAILURE FISCAL POLICY
FUNCTIONS CORRECT
MARKET FAILURE
Chapter 3: Money Market
Unit I Unit II Unit III

THE CONCEPT OF THE CONCEPT OF MONETARY
MONEY DEMAND MONEY SUPPLY POLICY
Chapter 4: International Trade
Unit I Unit II Unit III Unit IV Unit V

THEORIES OF THE EXCHANGE RATES INTERNATIONAL
TRADE
INTERNATIONAL INSTRUMENTS OF AND IT’S ECONOMIC CAPITAL
NEGOTIATIONS
TRADE TRADE POLICY EFFECTS MOVEMENTS
CA Parveen Jindal CA Sarthak Jain
Accounts & Financial Reporting Financial Reporting & Audit
CA Swapnil Patni CA Aarti Lahoti
Associated Faculties
Corporate Law & FM Eco Audit
CA V K Agrawal CA Dippak Gupta

Financial Reporting GST & Customs
CA Bhanwar Borana CA Farooq Haque

Direct Taxes GST & Customs
CA Abhishek Bansal CA Sankalp Kanstiya

Audit and Law Costing
CA Ravi Taori CA Mayank Kothari

Audit FM ECO, SFM, FSCM
CA Vinod Reddy CA Rakesh Agrawal
Costing Costing
CA Ravi Sonkhiya CA Rachana Ranade
Associated Faculties
Costing Audit
CA Purushottam Agrawal CA Manoj Batra

Costing GST & Customs
CA Ankita Patni CA Mahesh Gour

Law GST & Customs
CA Sanidhya Saraf CA Jai Chawla

Audit Financial Reporting
CA Ravi Shanker CA Shivangi Agarwal

Costing Economics for Finance

1.1 National Income Accounting

Uploaded by

Copyright:

Available Formats

1.1 National Income Accounting

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1.1 National Income Accounting

Uploaded by

Copyright:

Available Formats

Chapter 1

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

YouTube and Telegram is important.

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconn

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

2 Usefulness and Significance of National Income Estimates

3 Different Concepts of National Income

4 Measurement of National Income in India

5 The system of Regional Accounts in India

6 Limitations and Challenges of National Income Computation

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

The Level of National Income National Income Statistics

Distribution Pattern of National International Comparison of

Economic Welfare Policies for Growth and Inflation

National Income in terms of

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

National income accounts provide a comprehensive, conceptual and

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

The distribution pattern of national income determines the pattern of

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

Economic welfare depends to a considerable degree on the magnitude and

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

The estimates of national income show the composition and structure of

It is also possible to make temporal and spatial comparisons of the trend

Using these information, the governments can fix various sector-specific

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

National income statistics also provide a quantitative basis for

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

International comparisons in respect of incomes and living standards assist

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

National income or a relevant component of it is an indispensable variable

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

1 The Level of National Income 5 National Income Statistics

Distribution Pattern of National International Comparison of

3 Economic Welfare 7 Policies for Growth and Inflation

4 National Income in terms of

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

2 Usefulness and Significance of National Income Estimates

3 Different Concepts of National Income

4 Measurement of National Income in India

5 The system of Regional Accounts in India

6 Limitations and Challenges of National Income Computation

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in Revision

1 The Level of National Income 5 National Income Statistics

Distribution Pattern of National International Comparison of

3 Economic Welfare 7 Policies for Growth and Inflation

4 National Income in terms of

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in Revision

1 Gross Domestic Product

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

The term ‘gross’ implies that GDP is measured ‘gross’ of depreciation.

However, GDP excludes transfer payments, financial transactions and

- CA Mayank Kothari | CA Inter FM-ECO Video Lectures at caconnect.in

Gross Domestic Product

1. Value Added only becomes part of GDP