1. National Accounting System
GDP : Gross domestic Product
is the market value of all final goods and
services produced by a nation in a given period
• Real GDP
• Nominal GDP
• GDP deflator

2. GNP
Gross National Product : market value of all final
goods and services produced by normal
residents of a country in a year
GNP = GDP + Net factor income from abroad
Net factor Income from abroad = Factor income
from abroad – factor income to abroad
GNI = GNP

3. Methods
• Value added or production method
• Income method
• Expenditure method

4. Value added method
The economy is divided into different industrial
sectors. Then the net value added at factor
cost(NVAFC) by each enterprise is estimated
NDPFC = ∑ NVAFC
NI or NNPFC = NDPFC + Net factor income from
abroad

5. Income Method
National income is obtained by summing up the
incomes of all individuals of a country.
Productive enterprises are identified and then
classified into various industries
NDPFC = W + I + R + Profits + Mixed Income
NNPFC = NDPFC + Net factor income from abroad

6. Expenditure Method
Arrives at national income by adding up all
Expenditures made on goods and services.
Income is either spent on consumer goods or on
capital goods.
GDPMP = C + I + G + (X – M)
NDPMP = GDPMP - Depreciation
NDPFC = NDPMP – net indirect taxes
NNPFC = NDPFC + Net income from abroad

7. GDP Calculations
GDP = C + I + G + NX
C : Value of final consumer goods (durable and
non durable) and services consumed by the
individuals and households
I : Value of new capital goods produced and
addition to the inventories of goods
G : Value of purchases of goods and services by
the government
NX : (X –M); value of Exports – value of imports

8. Important Identities
Y = C + I + G + NX ;
YD : Disposable Income
YD = Y – TA + TR
TA : Total taxes
TR : Transfer Payments e.g. old age pension,
social security benefits, interest on public debt
etc
YD = C + S

9. Contd.
YD + TA - TR = C + I + G + NX ;
C + S + TA - TR = C + I + G + NX ;
S – I = (G + TR – TA) + NX ;
S – I = Budget deficit + Trade surplus ;
G + TR : Total government expenditure
TA : Government revenue

10. Limitations of National income accounting
• Some production not included in GDP. Ignores
“do it yourself”.
• Ignores the underground / unreported / illegal
activities
• Income must be imputed or estimated
because market exchange does not occur e.g.
imputed rental income, food produced and
consumed by farm families

11. Contd.
• Leisure, quality of life not included
• Quality improvement in product not included
• Quality of environment, negative externalities
e.g. pollution not included
• Ignores depletion of natural resources