What Is National Income Accounting? How It Works and Examples

Introduction to National Income Accounting

National income accounting is a system used to track the value produced and expended by a country over a period. It provides insight into an economy’s performance and includes 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.

Key Takeaways

• National income accounting provides insight into an economy’s performance.
• It includes total revenues by domestic corporations, wages paid, and sales and income tax data for companies.
• National income accounting systems enable countries to evaluate the current standard of living or the distribution of income within a population, as well as assess the impact of various economic policies.
• However, the accuracy of analyses relating to national income accounting is only as accurate as the data collected.

Understanding National Income Accounting

Although national income accounting is not an exact science, it provides useful insight into how well an economy is functioning and where money is being generated and spent. When combined with information about the associated population, data for per capita income and growth can be examined over a period.

Examples of Metrics Calculated and Data Published

Some of the metrics calculated using national income accounting include gross domestic product (GDP), gross national product (GNP), and gross national income (GNI). GDP is widely used for economic analysis on the domestic level and represents the total market value of the goods and services produced within a specific nation over a selected period. In the United States, the Bureau of Economic Analysis (BEA) prepares and publishes data on national income accounts.

Important Metrics

The BEA uses data from national income accounting to present a view of the nation’s levels of production, consumption, investment, exports, imports, income, and savings. Other examples of national income account data published by the BEA include domestic product and income, personal product and income, savings and investments, and foreign transactions.

Uses for National Income Accounting Data

The information collected through national income accounting can be used for various 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 economic sectors, as well as observing changes within those sectors over time. A thorough analysis can assist in determining the overall economic stability of a nation.

Formula for Calculating GDP

The commonly used formula for calculating GDP—the expenditure approach—is also known as the national income accounting equation. The formula is: GDP = C + G + I + (X – N), where C = Consumption, G = Government spending, I = Investment, X = Net exports, and N = Net imports.

Assess Economic Health and Set Policies

The quantitative information associated with national income accounting can be used to determine the effects 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. Central banks use the data to set and adjust monetary policy and the risk-free rate of interest. Governments also look at figures such as GDP growth and unemployment to set fiscal policy related to tax rates and infrastructure spending.

Examples of BEA Reports

The complete set of data reports produced by the BEA using national income accounting includes:

• Consumer Spending
• Corporate Profits
• Disposable Personal Income
• Fixed Assets by Type
• Gross Domestic Income
• Gross Domestic Purchases Price Index
• Gross Domestic Product
• GDP Price Deflator
• GDP Price Index
• Government Fixed Assets
• Government Receipts and Expenditures
• Industry Fixed Assets
• Personal Consumption Expenditures Price Index
• Personal Consumption Expenditures Price Index, Excluding Food and Energy
• Personal Income
• Personal Saving Rate

Criticisms of National Income Accounting

Analyses made using national income accounting are only as accurate as the data collected. In addition, data not provided in a timely fashion can render it useless for policy analysis and creation. Furthermore, certain data points are not examined, such as the impact the underground economy and illegal production have on national income.

Common Problems

The key issues with national income accounting are the exclusion of goods or services that have no monetary value and the possible double-counting of goods. Other issues include the fact that black market goods are excluded, and reliable and adequate data are generally lacking.

Frequently Asked Questions

What Is a Primary Use for National Income Accounting?

National income accounting is used to measure economic growth and activity. It can also be helpful in tracking trends and guiding monetary policy.

What Are the Problems of National Income Accounting?

The key issues with national income accounting are the exclusion of goods or services that have no monetary value and the possible double-counting of goods. Other issues include the fact that black market goods are excluded, and reliable and adequate data are generally lacking.

What Government Purchases Are Included in National Income Accounting?

National income accounting includes government purchases, such as any federal, state, or local government spending. Government purchases include infrastructure spending, such as buying steel for a project and paying employees. However, transfer payments, such as Social Security payments, are not included.

Conclusion

National income accounting assesses the economic activity of a nation, from wages to corporate revenues to taxes and more. Its data helps policymakers, economists, and investors to make decisions about their respective interests. Without access to the economic data of a nation, it would be hard for policymakers to adjust monetary policy, for investors to gauge where stocks may move, and for economists to understand how economic factors impact all facets of life.