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answer: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.
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CORPORATE FINANCE & ACCOUNTING ACCOUNTING
National Income Accounting
By WILL KENTON
Updated Jul 12, 2018
What Is National Income Accounting?
National income accounting is a bookkeeping system that a government uses to measure the level of the country's economic activity in a given time period. Accounting records of this nature include data regarding total revenues earned by domestic corporations, wages paid to foreign and domestic workers, and the amount spent on sales and income taxes by corporations and individuals residing in the country.
Although national income accounting is not an exact science, it provides useful insight into how well an economy is functioning, and where monies are being generated and spent. When combined with information regarding the associated population, data 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) and gross national income (GNI). The GDP is widely used for economic analysis on the domestic level and represents the total market value of the goods and service produced within a specific nation over a selected period of time.
National Income Accounting
Use in Economic Analysis
The information collected through national income accounting can be used for a variety of purposes, such as assessing the current standard of living or the distribution of income within a population. Additionally, national income accounting provides a method for comparing activities within different sectors in an economy, as well as changes within those sectors over time. A thorough analysis can assist in determining overall economic stability within a nation.
For example, the United States uses information regarding the current GDP in the formation of various policies. During the financial crisis of 2008, the GDP began to suffer as increased market volatility and shifting supply and demand affected consumer spending and employment levels. As a result, President Barack Obama, after taking office in 2009, instituted an economic stimulus package in response.
As an example, the basic accounting identity for GDP, sometimes known as the national income identity, is computed using the following formula:
GDP = consumption + investment + government spending + (exports − imports).
National Income Accounting and Economic Policy
The quantitative information associated with national income accounting can be used to determine the effect of various economic policies. Considered an aggregate of the economic activity within a nation, national income accounting provides economists and statisticians with detailed information that can be used to track the health of an economy and to forecast future growth and development.
The data can provide guidance regarding inflation policy and can be especially useful in the transitioning economies of developing nations, as well as statistics regarding production levels as related to shifting labor forces. These data are also used by central banks to set and adjust monetary policy and affect the risk-free rate of interest that they set. Governments also look at figures such as GDP growth and unemployment to set fiscal policy in terms of tax rates and infrastructure spending.
Inaccuracies in National Income Accounting
The accuracy of analysis relating to national income accounting is only as accurate as the data collected. Failure to provide the data in a timely fashion can render it useless in regard to policy analysis and creation.
Additionally, certain data points are not examined, such as the impact of the underground economy and illegal production. This means the activities are not reflected in the analysis even if their effect on the economy is strong. As a result, certain national accounts such as GDP or the CPIindex of inflation have been criticized on the grounds that they do not accurately capture the real economic condition of the economy.
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Gross National Product (GNP) Deflator
The gross national product deflator is an economic metric that accounts for the effects of inflation in the current year's gross national product.
Gross Domestic Product – GDP
Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period.
What Are Non-Farm Payrolls?
Non-farm payrolls are a labor measure encompassing the majority of job classifications in the U.S. but excluding farm workers and some other classes
undistributed profits are not estimated in National income.
Explain the precautions that should be taken while estimating national income by expenditure method.
Precautions Regarding Calculation of National Income by Expenditure Method
1. Expenditure on only final goods and services should be included in the national income estimation while intermediate consumption expenditure should not be included.
2. Similarly, expenditure on the purchase of second hand goods should not be included in the national income estimation of the current accounting year. This is because they have already been included in the national income of the accounting year in which they were originally purchased.
3. Expenditure on shares and bonds is not included. This is because these are mere financial assets and do not reflect any production activity of the goods or services.
4. Imputed value of the goods and services produced for self consumption are included.
5. Expenditure on transfer payments by the government should not be included. This because such payments are not related to any production activity in an economy.
1) While estimating national income, why do you use final
goods only? How is GDP calculated by the income
approach? Explain the different stages involved in it
20 Distinguish between the following:
a. GDP at market price and GNP at factor costs
Yb. Net National Product at constant prices and Net
Domestic Product at current prices.
d. Personal Income and Personal Disposable Income
3) Discuss the various sources of non-tax revenue in India.
* Differentiate between inflation and deflation. "Inflation is
unjust; deflation is inexpedient; of the two deflation is
worse". Enunciate the statement.
5) What do you mean by e-banking? What are the various
types of e-banking? Discuss the advantages and
disadvantages of e-banking in India.
6) Discuss the function, and role of IMF, World Bank and