National Income Accounting
Class 12 Economics · Introductory Macroeconomics · Chapter 2
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Summary
National income accounting measures the aggregate production, income and expenditure of an economy. The circular flow of income shows that the value of output produced by firms equals the factor incomes paid to households, which in turn equals the expenditure on final goods — so income can be measured in three equivalent ways. The product (value-added) method sums the value added by all producing units, avoiding double counting of intermediate goods. The income method adds factor incomes — wages, rent, interest and profit. The expenditure method sums spending on final goods: \(GDP=C+I+G+(X-M)\). Several aggregates follow. Gross Domestic Product (GDP) measures output within the domestic territory, while Gross National Product adds net factor income from abroad, \(GNP=GDP+NFIA\). Subtracting depreciation gives net product, and subtracting net indirect taxes converts market-price measures to factor-cost measures, leading to National Income (NNP at factor cost). The chapter distinguishes nominal GDP (at current prices) from real GDP (at constant prices), and defines the GDP deflator \(=\dfrac{\text{Nominal GDP}}{\text{Real GDP}}\times 100\) along with the Consumer Price Index and Wholesale Price Index as measures of the price level. Finally it notes the limitations of GDP as an index of welfare — it ignores the distribution of income, non-market activities and externalities.
Key terms
Circular flow of income
The flow showing that output equals factor income equals expenditure on final goods.
Value added
The difference between the value of a firm’s output and the value of its intermediate inputs.
Gross Domestic Product
The market value of all final goods and services produced within a country in a year.
Net factor income from abroad
Factor income earned by residents abroad minus factor income paid to non-residents, linking GDP and GNP.
GDP deflator
A price index, \(\dfrac{\text{Nominal GDP}}{\text{Real GDP}}\times 100\), measuring the general price level.
Real GDP
GDP valued at constant (base-year) prices, removing the effect of price changes.
Extra questions & answers
Try one from this chapter
The circular flow of income shows that: