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NATIONAL INCOME ACCOUNTING

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					NATIONAL INCOME ACCOUNTING

National income accounting refers to a set of rules and techniques that are used to
measure the national income of a country. Singapore follows the concepts and
methodology recommended in the United Nations publication “A system of National
Accounts, 1968” for the compilation of national figures. This is to ensure that Singapore
national statistics will be consistent and compared with other countries.

National Income

National income is a measure of the value of goods and goods produced by the residents
of an economy in a given period of time, usually a quarter or a year.

National income can be real or nominal. Nominal national income refers to the current
year production of goods and services valued at current year prices. Real national income
refers to the current year production of goods and service valued at base year prices.

In estimating national income, only productive activities are included in the computation
of national income. In addition, only the values of goods and services produced in the
current year are included in the computation of national income. Hence, gain from resale
are excluded but the services provided by the agents are counted. Similarly, transfer
payments are excluded as there is income received but no good or service produced in
return. However, not all goods and services from productive activities enter into market
transactions. Hence, imputations are made for these non-marketed but productive
activities eg imputed rental for owner-occupied housing. Thus, national income refers to
the market value or imputed value of additional goods and services produced and services
performed in the current period.

GDP, GNP, NDP and NNP

National income in many countries are either in Gross Domestic Product (GDP) or Gross
National Product (GNP).

Gross Domestic product (GDP) refers to the total value of goods and services produced
within the geographical boundary of a country before the deduction of capital
consumption. Net Domestic product (NPD) refers to the total value of goods and services
produced within the geographical boundary of a country after the deduction of capital
consumption.

Gross National Product (GNP) refers to the total value of goods and services produced by
productive factors owned by residents of the country both inside and outside of the
country before the deduction of capital consumption. Net National Product (NNP) ) refers
to the total value of goods and services produced by productive factors owned by
residents of the country both inside and outside of the country after the deduction of
capital consumption.
Relationship between GDP and GNP

GNP = GDP + NPIFA (Net Property Income from Abroad)

Net Property Income from abroad refers to the difference between income from abroad
and income to abroad.

Market Price and Factor Cost

Market price refers to the actual transacted price and it includes custom duty, excise duty
and other indirect taxes but it excludes government grants and subsidies.

Factor cost refers to the actual cost of the various factors of production and it includes
government grants and subsidies but it excludes indirect taxes.

Relationship between market price and factor cost

GNP at factor cost = GNP at market price – indirect taxes + subsidies

GDP at factor cost = GDP at market price – indirect taxes + subsidies

Transfer Payments

Transfer payment refers to government to individuals for which there no economic
activity is produced in return by these individuals. Examples of transfer are scholarship,
pension.

Personal Income and Disposable Income

Personal Income refers to the income available to individuals. Disposable income refers
to the income that the individuals can actually spend or save.

National Income (NNP at factor cost)
Less Retained earnings, company taxes
Add transfer Payments
Personal Income
Less CPF, CDAC
Disposable Income

Measurement of National Income

There are 3 approaches to measure national income ie output approach, income approach
and expenditure approach.
Theoretically, the national income calculated from the 3 approaches are the same ie

Expenditure                           Output                          Income
Approach                             Approach                        Approach

Expenditure                        Value of                        Income
on goods            =                goods and               =      Earned by
and services                     services produced               factor owners

$100m Spent         =              $100m worth of goods          =      Income of
                                 and services produced                   $100m

Hence, GDE = GDP + GDI, GNE = GNP = GNI, NDE = NDP = NDI,
NNE = NNP +NNI.. But in practice, these measures are usually not equal to one another.

Output Approach

Output approach measures national income by adding the total value of the final goods
and services produced in the year or by adding the value added by each sector of the
economy.

Value added

Value added refers to the difference between the value of gross output of all goods and
services produced in a given period and the value of intermediate inputs used in the
production process during the same period.

In distributive trade, value added is the difference between the gross margin and the cost
of intermediate inputs. In the banking sector, value added is the difference between the
sum of actual and imputed bank service charges and intermediate inputs. For government
services and non-profit institutions, value added is the wages and salaries, and
depreciation allowance set aside for consumption of fixed capital.

An example on the computation of value added

Production           Value of              Costs of Output                 Value
Stage                 Sale             from previous production stage      Added

Intermediate
Goods

Wheat                   $0.20          -             $0.00              = $0.20
Flour                    $0.45         -             $0.20              = $0.25
Wholesale Bread         $0.95         -              $0.45              = $0.50
Final Good

Retail Bread          $1.25          -        $0.95              =   $0.30

Sum of value added at each production stage                     = $1.25

Note : Value of final good and sum of value added at each production stage is the same ie
$1.25. Double counting or multiple counting of the value of wheat at each production
stage is avoided when the value added or final value is used in the computation as the
value of wheat is counted only once in the value added method or the final value method.

Computation National Output by output approach ie sum of value added by each sector in
the economy)

Agriculture and Fishing
Quarrying
Manufacturing
Utilities
Construction
Commerce
Transport and Communication
Financial and Business Services
Other Services eg Government Departments and Statutory Boards
Statistical Discrepancies
GDP at factor cost
Add NPIFA
GNP at factor cost
Less Capital Consumption
NNP at factor cost (National Income)

Income Approach

Income approach measures national income by adding the income earned by the factor
owners that are residents of the country, undistributed company profits and government
income from economic participation. It excludes transfer payments and stock
appreciation because transfer payments and stock appreciation are not due to goods and
services performed.

Computation of National Income by Income Approach

Income from Employment
Income from Self-employment
Gross trading profits of companies
Gross trading surplus of public corporations
Gross trading surplus of general government enterprises
Rent, Interest and Dividend
Imputed rent for owner-occupied houses
Total Domestic Income
Less Stock Appreciation
GDP at factor cost
Statistical Discrepancies
Add NPIFA
GNP at factor cost
Less Capital Consumption
NNP at factor cost (National Income)

Expenditure Approach

Expenditure Approach measures national income by adding the private consumption
expenditure, government consumption expenditure, gross fixed capital formation ie
investment expenditure, increase in physical stocks and net exports of goods and servces
ie the difference between exports and imports.

It only includes expenditure on goods and services to satisfy the needs of final buyers. It
excludes expenditure on intermediate of goods and services. Moreover, resale of
consumer and capital goods are excluded because the expenditures are on these resale
goods, not goods produced in the current period and hence expenditures on resale goods
are not counted.

Private Consumption Expenditure

Private consumption expenditure refers to the final purchases of goods and services by
households. It includes expenditure on single use consumption or non-durable goods eg
food, durable goods eg TV, washing machines, and services eg hairdressing services and
medical services.

Household purchases of new houses are treated as investment expenditure and hence
residential investments are not included in private consumption expenditure. Instead
residential investments are included in investment expenditure. Resale of consumer
durables eg second hand TV are excluded as the expenditures are on second hand TV, not
TV produced in the current year and hence expenditures on second hand TV are not
included in the private consumption expenditure.

Government Consumption Expenditure / General Government Expenditure

Government consumption expenditure refers to the cost of running the various
government departments an public non-profit organizations to provide goods and services
for the public. It excludes the expenditure by government on grants, interest subsidies,
transfer payments, loans and repayments.
Gross Domestic Fixed Capital Formation / Investment Expenditure

Investment expenditure refers to the expenditure on equipments and machinery,
residential and non-residential construction, and changes in inventories. An increase in
inventories is treated as an investment and a fall in inventories is treated as dis-
investment. Resales of capital goods are excluded from investment expenditure.

Gross Investment = Net Investment + Replacement Investment

Gross investment refers to the new capital goods produced that can be used to the capital
stock or to replace the existing worn-out capital goods. Net Investment refers to the new
capital goods that are added to the capital stock. Replacement investment refers to the
new capital goods that are used to replace the existing worn-out capital goods.

Net Exports of Goods and Services

Net exports of goods and services refers to the difference between the exports of goods
and services and imports of goods and services.

Exports of goods and services refers to goods and services that are produced in the
country but they are sold to foreigners for their consumption. Imports of goods and
services refer to goods and services that are produced by other countries but they are
consumed within the country.

Computation of National Income by Expenditure Approach

Private Consumption Expenditure
Government Consumption Expenditure
Gross Domestic Fixed Capital Formation / Investment Expenditure
Value of Increase in Inventories and Work-in-Progress
Total Domestic Expenditure
Add Exports of Goods and Services
Total Final Expenditure
Less Imports of Goods and Services
Statistical Discrepancies
GDP at market price
Less Indirect Taxes
Add Subsidies
GDP at factor cost
Add NPIFA
GNP at factor cost
Less Capital Consumption
NNP at factor cost (National Income)
GDP Deflator

GDP deflator refers to a price index that shows the average increase in prices of all goods
and services produced in the current year as compared to that of a base year.

The GDP deflator is used to convert the current year nominal GDP into current year real
GDP. Economic growth of a country is calculated by the changes in the real GDP of 2
different years or quarters.

Current Year GDP                        Current Year GDP
At base year prices =       at current year prices ie current year nominal GDP
(ie current year         --------------------------------------------------------------- X 100
 real GDP)                   Current Year GDP Deflator


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