national income accounts

Fig. 133 National income accounts. (a) See entry. (b) UK GDP at market prices, 2003 (expenditure method). Note: letters in brackets correspond to the usual AGGREGATE DEMAND (AD). Notation: AD = C + I + G + [X-M]. Source: Office for National Statistics, 2004.

national income accounts

National income can be considered in three ways, as Fig. 133 (a) suggests:

1. the domestic product/output of goods and services produced by enterprises within the country (value-added approach to GDP). This total output does not include the value of imported goods and services. To avoid overstating the value of output produced by double counting both the final output of goods and services and the output of intermediate components and services that are eventually absorbed in final output, only the VALUE ADDED at each stage of the production process is counted. The sum of all the value added by various sections of the economy (agriculture, manufacturing, etc.) is known as the GROSS DOMESTIC PRODUCT (GDP); and to arrive at the GROSS NATIONAL PRODUCT (GNP), it is necessary to add net property income from abroad (defined as net income in the form of interest, rent, profits and dividends accruing to a nation's citizens from their ownership of assets abroad);
2. the total INCOME of residents of the country derived from the current production of goods and services (income approach to GDP). Such incomes are called FACTOR INCOMES because they accrue to factors of production, and they exclude TRANSFER PAYMENTS like sickness or social security benefits for which no goods or services are received in return. The sum of all these factor incomes (wages and salaries, incomes of the self-employed, etc.) should exactly match the gross domestic product, since each £1's worth of goods and services produced should simultaneously produce £1 of factor income for their producers. To get from gross domestic factor incomes (= gross domestic product) to gross national factor incomes (= gross national product), it is necessary to add net property income from abroad;
3. the total domestic expenditure by residents of a country on consumption and investment goods (expenditure approach to GDP). This includes expenditure on final goods and services (excluding expenditure on intermediate products) and includes goods that are unsold and added to stock (inventory investment). However, some domestic expenditure will be channelled to imported goods, while expenditure by nonresidents on goods and services produced by domestic residents will add to the factor incomes of these residents. Thus, to get from total domestic expenditure to total national expenditure (= gross national product), it is necessary to deduct imports and add exports.

All three measures outlined above show the gross money value of goods and services produced - the gross national product. In the process of producing these goods and services, however, the nation's capital stock will be subject to wear and tear, so we must allow for the net money value of goods and services produced (allowing for the depreciation of the capital stock or CAPITAL CONSUMPTION) - the NET NATIONAL PRODUCT. This net national product is called national income.

In practice, data-collection problems mean that the three measures of national income give slightly different figures, necessitating the introduction of a residual error term in the national income accounts that reflects these differences. Additionally, in order to highlight the difference in the money and REAL VALUE of national income, it is necessary to take account of the effects of INFLATION upon GNP by applying a broad-based PRICE INDEX, called the GNP-DEFLATOR. See alsoBLACK ECONOMY.

By way of a ‘practical’ example, Fig. 133 gives a ‘standard’ expenditure-based breakdown of the UK's gross domestic product (GDP), which is used by the government for economic policy purposes.