PPT 2 , NIA

National Income Accounting
What is national Income Accounting?
 National income accounting is a bookkeeping system that a national

government uses to measure the level of the country's economic activity in a
given time period.
 National income accounting provides useful insight how well an economy is
functioning, and where monies are being generated and spent. When
combined with information regarding the associated population, information
regarding per capita income and growth can be examined over a period of
time.
 Some of the metrics calculated by using national income accounting include
gross domestic product (GDP), gross national product (GNP) etc.
Gross Domestic Product (GDP)
 Gross domestic product (GDP) is the monetary value of all the final/ finished
goods and services produced within a country's borders in a specific time
period, generally in one year.
Significance of GDP
 Gross domestic product (GDP) is the monetary value of all finished goods and
services made within a country during a specific period.
 GDP is commonly used as an indicator of the economic health of a country, as

well as a gauge of a country's standard of living.
 GDP provides an economic snapshot of a country, used to estimate the size of

an economy and growth rate.
Three approaches to Determine GDP
 What is expenditure approach?

 What is output approach?
 What is income approach?
 What are the components to calculate expenditure approach?
 Expenditure Approach:
 The expenditure approach or spending approach which is the most
common method, calculates the monies spent by the different groups that
participate in the economy. For instance, consumers spend money to buy
various goods and services and businesses spend money as they invest in
their business activities (buying machinery, for instance). And governments
also spend money. All these activities contribute to the GDP of a country.
 A country's gross domestic product can be calculated using the following
formula:
 GDP = C + I + G
 Where, C is equal to all private consumption, or consumer spending, in a
nation's economy, I is the sum of all the country's investment, including
businesses capital expenditures and G is the sum of government spending.
What are the components to calculate Output
approach?
 Output Approach:
The output approach is something like the reverse of the expenditure
approach. Instead of exclusively measuring input costs that feed economic
activity, the production approach estimates the total value of economic
output and deducts costs of intermediate goods that are consumed in the
process, like those of materials and services. Whereas the expenditure
approach projects forward beyond intermediate costs, the production
approach looks backward from the vantage of a state of completed economic
activity.
What are the components to calculate
Income approach?
 National Income = Compensation to Employees
(Wages) + Rents + Interest + Proprietor’s Income +
Corporate Profits
 To go from National Income to GDP you must add --
Indirect Business Taxes (sometimes called sales taxes),
Depreciation (the value of the capital that is used up
by producing the output of the economy), and Net
Foreign Factor Income (NFFI) to National Income. The
final Income Approach to the GDP is therefore given
by:
Income approach (Continued)
 Y = National Income + Indirect Business Taxes + Depreciation + NFFI

Where, again, Y equals GDP.
 Indirect business taxes : sometimes also called hidden taxes. These are taxes that can
be passed to your customers by being built into a higher price. The purchaser may not
be aware that tax is included in the price, which is why indirect taxes are sometimes
called “hidden taxes.”
 Net Foreign Factor Income (NFFI): is the difference between the aggregate amount
that a country’s citizens and companies earn abroad and the aggregate amount that
foreign citizens and overseas companies earn in that country.
 National Income = Compensation to Employees (Wages) + Rents + Interest +
Proprietor’s Income + Indirect Business Taxes + Depreciation + NFFI
Gross National Product(GNP)
 Gross National Product (GNP) is the market value of all goods and Services
produced by the nation (e.g.BD citizens) wherever they are located.
Gross National Product(GNP) Formula
 GNP= C + I + G + NX
 Where,
C= Consumption
I= Investment
G= Government Expenditure
NX= Net Exports (value of export - value of imports )
Difference Between GDP & GNP
Difference between calculation of GDP &
GNP
GDP = Citizen’s income + Foreigner’s Income – Income of Bangladeshi people who

living abroad (Remittance)
GNP = Bangladeshi citizen’s income - Foreigner’s Income + Remittance + NX
Here,
NX = X – M
Where,
X = Export
M = Import
NX = Net Export
Net National Product
Net national product (NNP) is the total value of finished goods and services
produced by a country’s.
i.e. the total market value of all final goods and services produced by the factors
of production of a country or other polity during a given time period, minus
depreciation.
NNP=GNP-Depreciation
Rules for Computing GDP
We can compute GDP by adding up the total expenditure on bread

Production and sale of a vast number of different goods and services
The National income accounts use market prices because these prices reflect how
much people are willing to pay for goods and service.
GDP=(P1.Q1)+(P2.Q2)
Double Counting Problem
 Intermediate Goods and Value Added Many goods are produced in stages: raw
materials are processed into intermediate goods by one firm and then sold to
another firm for final processing. How should we treat such products when
computing GDP?
 For example, suppose a cattle rancher sells one-quarter pound of meat to
McDonald’s for $1, and then McDonald’s sells you a hamburger for $3. Should
GDP include both the meat and the hamburger (a total of $4) or just the
hamburger ($3)?
 The answer is that GDP includes only the value of final goods. Thus, the
hamburger is included in GDP but the meat is not: GDP increases by $3, not by
$4. The reason is that the value of intermediate goods is already included as
part of the market price of the final goods in which they are used. To add the
intermediate goods to the final goods would be double counting—that is, the
meat would be counted twice. Hence, GDP is the total value of final goods and services
produced.
Real GDP
 Real GDP is a macroeconomic static that measures the value of the goods and
services produced by an economy in a specific period while the price will be
compared as base year price.
 RGDP = P0 X Qt*
Where,
P0 = Price of base year
Qt = Quantity of current year
Nominal GDP
 What is Nominal GDP?

The nominal gross domestic product measures the value of all goods and services
produced expressed in current year’s price.
 Formula for Nominal GDP
 NGDP=Pt X Qt
Where,
Pt = Price of current year
Qt = Quantity of current year
The GDP deflator
 The GDP deflator, also called implicit price deflator, is a measure of inflation.
 Formula –
GDP Price Deflator = (Nominal GDP ÷ Real GDP)*100
Example -
Nominal GDP of $10 billion
Real GDP of $8 billion.
So, GDP deflator =($10 billion / $8 billion) x 100,

= 125 %
Economic Growth
Economic Growth
 The economic growth rate is the percentage change in the quantity of goods and
services produced from one year to next. It shows the overall growth performance of
the economy.
 To calculate the economic growth rate, we use the formula:
Real GDP this year-Real GDP last year

 Economic growth rate = _________________________________ x 100
Real GDP last year

Consumer Price Index (CPI)
 The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical
consumer.
 Every month, the Bureau of Labor Statistics (BLS), which is part of the Department of Labor, computes and reports the
CPI.
 Calculation
1. Fix the basket: Determine which prices are most important to the typical consumer. If the typical consumer buys more
hot dogs than hamburgers, then the price of hot dogs is more important than the price of hamburgers and, therefore,
should be given greater weight in measuring the cost of living.
2. Find the prices: Find the prices of each of the goods and services in the basket at each point in time.
3. Compute the basket’s cost: Use the data on prices to calculate the cost of the basket of goods and services at different
times.
4. Choose a base year and compute the index.
Consumer price index (CPI) = Price of basket of goods and services in current year
______________________________________________ X 100
Price of basket in base year
5. Compute the inflation rate: Use the CPI to calculate the inflation rate, which is the percentage change in the price
index from the preceding period. That is, the inflation rate between two consecutive years is computed as follows:
Inflation rate in year 2= CPI in year 2 - CPI in year 1
_______________________ X 100
CPI in year 1
CPI Calculation

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National Income Accounting

What is national Income Accounting?

 National income accounting is a bookkeeping system that a national

 GDP is commonly used as an indicator of the economic health of a country, as

 GDP provides an economic snapshot of a country, used to estimate the size of

 What is expenditure approach?

 Y = National Income + Indirect Business Taxes + Depreciation + NFFI

GDP = Citizen’s income + Foreigner’s Income – Income of Bangladeshi people who

We can compute GDP by adding up the total expenditure on bread

 What is Nominal GDP?

So, GDP deflator =($10 billion / $8 billion) x 100,

 To calculate the economic growth rate, we use the formula:

Real GDP this year-Real GDP last year

Real GDP last year

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