National Income Accounting (Unit A)

1) What is National Income Accounting?

National Income Accounting is the system used to measure the level of economic activity in an economy over a period of time (usually a year/quarter). It summarizes:

total production/output,
total income generated,
total expenditure on final goods and services.

1.1 Core identity (why accounts “match”)

In a closed economy with no statistical discrepancy:

\text{Value of Output} = \text{Income Generated} = \text{Expenditure on Final Output}

This works because:

production generates incomes (wages, rent, interest, profit),
those incomes are spent on output (final goods/services).

2) Key aggregates and their meanings (high-yield)

2.1 GDP (Gross Domestic Product)

Value of final goods and services produced within domestic territory in a given period.

“Gross” includes depreciation (capital consumption).
“Domestic” = within country borders (regardless of who owns factors).

2.2 GNP (Gross National Product)

Value of final goods and services produced by nationals (residents) regardless of location.

GNP = GDP + \text{NFIA}

where NFIA = Net Factor Income from Abroad
= (Factor income received from abroad − Factor income paid to abroad)

2.3 NDP and NNP (net concepts)

Net means depreciation is subtracted.

NDP = GDP - Depreciation

NNP = GNP - Depreciation

2.4 National Income (NI)

In many textbooks, NI is approximated by:

NI \approx NNP_{FC}

i.e., Net National Product at Factor Cost.

3) Market price vs factor cost (very testable in Indian exams)

3.1 Factor cost (FC)

Payments to factors of production:

wages, rent, interest, profit.

3.2 Market price (MP)

What buyers pay in the market; includes taxes and excludes subsidies.

Relationship using NIT (Net Indirect Taxes):

NIT = Indirect\ Taxes - Subsidies

Conversion:

\text{At MP} = \text{At FC} + NIT

\text{At FC} = \text{At MP} - NIT