National Income Accounting

National income accounting represents the process of working out measures of a country’s income and production such as gross domestic product (GDP), gross national income (GNI), net national product (NNP), disposable personal income, etc.

No serious analysis of an economy can be conducted if we do not have numbers about total production, employment, inflation, etc. Reliable, relevant and recent numbers are critical in formulating fiscal and monetary policies that would encourage growth while preserving stability. It can be argued that lack of such numbers was what worsened the Great Depression. It is no coincidence that elaborate system of national income accounting was developed during the Great Recession and World War 2.

In US, national income and product accounts are prepared and published by Bureau of Economic Analysis (BEA), a part of the Department of Commerce. The World Bank, IMF and OECD aggregate and publish statistics about the global economy.

National Income Accounting Identity

National income accounting identity is an equation that shows relationship between an economy’s total income/expense and its different categories i.e. personal consumption expenditure (C), private investment (I), government spending (G) and net exports i.e. exports (X) minus imports (M).

The relationship can be written as follows:

$$ Y\ =\ C\ +\ I\ +\ G\ +\ X\ – M $$

It is to national income accounting what assets (A) = liabilities (L) + equity (E) is to business accounting.

The national income accounting identify is effectively the definition of gross domestic product (using the expenditure approach).

Gross Domestic Product

The most important number produced by the national income accounting is the gross domestic product (GDP), which is the market value of all final goods and services produced within geographical boundaries of a country. GDP is a measure of total production that takes place inside the border of a country. It also a measure of total expenses incurred on final goods and services and also a measure of total income. This is due to the circular flow of income i.e. total income in an economy equals total expense.

There are two variants of GDP: nominal GDP which is value of production based on current prices and real GDP is the inflation-adjusted measure of GDP.

All other indicators of national income are derived from GDP.

GDP per capita

GDP per capita means the average income earned by a person in a country. It is calculated by dividing total GDP by the country’s population.

Total gross domestic product is not comparable across economies because their size differ depending on the resources available to them such as land, population, etc. but the GDP per capita is a standardized measure which enables comparison of standard of life across countries possible.

Gross National Product

Gross national product (also called gross national income) is the total income earned by the residents of a country. It equals gross domestic product (GDP) plus income earned by a country’s residents abroad (R) minus income earned by foreigners in a country (P):

$$ GNP\ =\ GDP\ +\ R\ -\ P $$

While GDP measures the income earned within geographical boundaries of a country, GNP calculates the income earned by a country’s residents/nationals.

Net National Product

Income generated by a country is achieved on the back of significant investment infrastructure i.e. roads, bridges, etc. which must be maintained. If we are interested in finding out the income generated net of such charge for periodic maintenance of such infrastructure, we calculate net national product (NNP) which equals gross national product (GDP) minus depreciation D.

$$ NNP\ =\ GNP\ – D $$

National income (NI) is most comprehensive measure of total income earned by residents of a country. It is approximately equal to net national product (NNP) except for an adjustment for statistical discreprency.

Personal Income

Personal income is the gross amount attributable to residents of a country. It is the sum of all incomes in the hand of individuals.

Measures of aggregate income such as GDP, GNI, NNP and NI are broad economy-level measures of income and production which do not segregate transfer payments, taxes, etc. But if we are interested in finding out how much money ultimately accrues to people, we need to calculate personal income.

Personal income (PI) equals national income minus indirect taxes (IDT) such as sales tax, VAT minus corporate profits (CP) minus net interest (NETI) plus income from assets (such as dividends, interest payments, etc. (IA) plus transfer payments i.e. amount paid by government to people with low incomes (TP) minus social security contribution made by people (SS)

$$ PI=NI-\ IDT-CP-NETI+IA+TP\ -\ SS $$

Disposable Income

Disposable income is the income that is at the disposal of residents of the country i.e. it is the income which they can consume or save.

Disposable income equals personal income (PI) minus personal income taxes (PIT):

$$ Disposable\ Income\ =\ PI\ -\ PIT $$

Written by Obaidullah Jan, ACA, CFA and last modified on