National Income Accounting

What is National Income Accounting?

National income accounting refers to the government bookkeeping system that measures the health of an economy, projected growth, economic activity, and development during a certain period of time. It helps in assessing the performance of an economy and the flow of money in an economy. The double entry system principle of accounting is used to prepare the national income accounts.

In the U.S., the Bureau of Economic Analysis (BEA), a part of the Department of Commerce, prepares and publishes national income accounts. Global economic figures are aggregated and distributed by the International Monetary Fund (IMF), the World Bank, and the Organization for Economic Cooperation and Development (OECD).

National Income Accounting Equation

The national income equation represents the relationship between national income and the economy’s expense, along with other attributes, as shown in the following equation:

Where:

• Y – National income
• C – Personal consumption expenditure
• I – Private investment
• G – Government spending
• X – Exports
• M – Imports

National Income Accounting and Gross Domestic Product

Gross Domestic Product (GDP), Net National Product (NNP), Gross National Product (GNP), personal income, and disposable income are the important metrics determined by national income accounting.

However, the most commonly used measure of the economy is GDP. It is the cumulative value of products and services generated in an economy over a given period of time. Only the goods produced in the home country are included in the GDP, regardless of the nationality status of the company owners.

The gross domestic product figure may not represent the correct value, as some goods may not even make it to the market, which makes it difficult to determine the true value of the market. Nevertheless, GDP reasonably represents the national output. The other economic measures can be derived from GDP.

National Income Accounting Methods

The following methods are used to measure national income:

1. Product method

Also known as the value-added method, the product method is based on the net value added to the product at every stage of production. In the product method, the economy is usually divided into different industry sectors, such as fishing, agriculture, and transport.

The national income is calculated by adding the total output of the companies in the economy. The method shows the contribution of each sector to the national income, hence demonstrating the importance of different sectors relative to each other.

2. Income method

In the income method, the national income is measured by adding up the pretax income generated by the individuals and companies in the economy. It consists of income from wages, rent of buildings and land, interest on capital, profits, etc. in an accounting year. The income method shows the national income distribution among different earning groups in the economy.

3. Expenditure method

In the expenditure method, the national income is measured by adding up the expenditures made by individuals, companies, and the government. Thus, it combines consumer spending, investments made by companies, net exports, and government spending to calculate the national income.

Importance of National Income Accounting

• The statistics provided by national income accounting can be used to simplify the procedures and techniques used to measure the aggregate input and output of an economy.
• The data provided is used to frame government economic policies, and it also helps in recognizing the systemic changes happening in the economy.
• National income accounting provides information on the trend of economic activity level. Various social and economic phenomena can be explained through the data, which helps the policymakers in framing better economic policies.
• Central banks can use the national income accounting statistics to vary the rate of interest and set or revise the monetary policy.
• The data on GDP, investments, and expenditures also helps the government to frame or modify policies regarding infrastructure spending and tax rates.
• The national income accounting data also shows the contribution of different sectors, relative to each other, towards economic growth.

Related Readings

Thank you for reading CFI’s guide to National Income Accounting. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Fiscal Policy
• Capital Expenditures
• Consumer Price Index (CPI)
• Nominal GDP vs. Real GDP
• See all economics resources