Revision: Introductory Macroeconomics >> National Income Accounting Economics Commerce (English Medium) Class 12 CBSE

Value Addition: Value addition on a good refers to the increase in the value of good at each successive stage of production. Algebraically, Value Addition is the difference between the total value of the output and the total value of the intermediate consumption.

Value Addition = Total Value of Output – Total Value of Intermediate Consumption.

"Private income is the total of factor incomes from all sources and current transfers from the Government and rest of the world accruing to private sector." – C.S.O.

\[\mathrm{GDP}\equiv\sum_{i=1}^N\mathrm{GVA}_i\]

National Income (NI) or Gross National Product at market prices can be written as:
NI = C + I + G + (X − M) + (R − P)

Where:

• C: Private Final Consumption Expenditure
• I: Private Domestic Investment Expenditure
• G: Government Final Consumption and Investment Expenditure
• $(X-M)$: Net Exports (Exports minus Imports)
• $(R-P)$: Net Receipts from abroad on account of goods and services

National Income (NI) using this income method is expressed as:

NI = R + W + I + P + MI + (X − M) + (R − P)

Where:

• R: Rent (including imputed rent of owner-occupied houses and income from government property)
• W: Wages and salaries (compensation of employees)
• I: Interest
• P: Profits (including distributed, undistributed, and corporate tax)
• MI: Mixed income of self-employed (where labour and capital income cannot be separated)
• X−M: Net exports (exports minus imports of goods and services)
• R−P: Net receipts from abroad (net income from abroad, such as factor income received from the rest of the world minus factor income paid abroad)

In words, national income is the sum of all domestic factor incomes plus net exports and net factor receipts from abroad.

PI = NI − Undistributed profits − Net interest payments made by households − Corporate tax + Transfer payments to households

NI ≡ NNP at factor cost = NNP at market prices − (Indirect taxes − Subsidies)

or

NNP at factor cost = NNP at market prices − Net indirect taxes

GNP = GDP + Net factor income from abroad

where

Net factor income from abroad = Factor income earned by domestic factors abroad

NNP = GNP − Depreciation

PDI = PI − Personal tax payments − Non-tax payments

National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world

Private Income can be expressed as under:

Or

\[\mathrm{WPI}=\frac{\text{Cost of wholesale basket in current year}}{\text{Cost of same wholesale basket in base year}}\times100\]

Value of current year output at base year prices.

Real GDP = ∑ (Current year quantity × Base year price)

Using nominal GDP = GDP and real GDP = gdp:

\[\text{GDP Deflator}=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\]

In percentage form:

\[\text{GDP Deflator }(\%)=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\times100\]

Value of current year output at current year prices.

Nominal GDP = ∑ (Current year quantity × Current year price)

\[\mathrm{CPI}=\frac{\text{Cost of fixed basket in current year}}{\text{Cost of same basket in base year}}\times100\]

• A country’s wealth depends on how resources are used to generate a continuous flow of production, income and wealth, not just on having natural resources.
• Final goods are bought for ultimate use (no further production use); they can be consumption goods (food, clothing, recreation) or capital goods (machines, tools).
• Consumer durables (TVs, cars, home computers) are final consumption goods that last a long time and need maintenance, like capital goods.
• Intermediate goods (like steel sheets, cotton, yarn) are used as inputs to produce other goods and are not counted as final output.

• Total production is measured by adding the money value of all final goods and services only, so that intermediate goods are not double counted.
• Flows are measured over time (like income per year); stocks are measured at a point in time (like capital on a particular date).
• Net investment = Gross investment − Depreciation (only net investment adds to new capital stock).

• Depreciation is the annual allowance for wear and tear of a capital good, equal to its cost divided by its useful life in years.
• In any year, total final output is split between consumption goods and capital goods; more capital goods now usually mean more capacity to produce consumer goods in the future.
• There is a circular flow: firms pay incomes (wages, rent, interest, profit) to households for factor services; households use these incomes to buy goods and services from firms, enabling firms to sell their output.

• In a simple economy (no government, no trade, no saving), households earn wages, rent, interest and profit, and spend all their income on firms’ goods and services.
• The same income circulates: firms’ factor payments = households’ spending = firms’ sales, so aggregate income = aggregate expenditure = total value of final output.
• Hence national income can be calculated in three equal ways: by total spending, by total output, or by total factor incomes.