National Income Accounting

National Income Accounting

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The national income accounting definition is the same for all countries irrespective of geographical location, economic set-up or demography which highlights the fact that it is a key determinant of economics for all governments. Although it is not an exact science yet it provides a meaningful insight as to how well an economy is working and the areas where money is being spent and generated from. When it is combined with the data concerning an associated population, information about the growth and per capita income can be analysed over a period.

It is a bookkeeping method that governments make use of for determining the level of a nation’s economic activity within a period and some of the important measures include the gross domestic product (GDP), gross national product (GNP) and gross national income (GNI). Thus, the national income accounting formula lays ample emphasis on GDP using the expenditure approach and the formula for the same is represented as

GDP = C + G + I + NX

where,

C = Consumption

G = Government Spending

I = Investment

NX = Net Exports (Exports – Imports)

Thus, national income accounting furnishes a method of activity comparison within various sectors and the variation within those sectors in a period. A complete analysis of the same can help in determining the economic stability of a country.

Once the national income is determined, national income average can also be found out and it is also an important marker in understanding the economic health of a nation. This average is also popularly known as the per capita income and it highlights the average income that is earned by a person in a specific year within a given area. It can simply be calculated by dividing a country’s aggregate income by its total population. It is used to determine a country’s standard of living, a sector’s average income, and for wealth comparison of different populations.

Thus, theuses of national income are varied but it primarily helps with economic planning, understanding the distribution of income and calculating per capita income. The information is also helpful to measure the rate of growth of a nation, compare the standards of living in different countries and estimate inflationary and deflationary pressures. It also helps in tracking trends and in formulating monetary policy like policy tax rate setting, etc.