National Income Accounting

About this unit

This unit opens macroeconomics, which looks at the economy as a whole rather than at a single consumer or firm. It explains how a country measures the total value of goods and services it produces in a year, and how income flows between households, firms, the government and the rest of the world. The concepts built here, such as GDP, value added and factor cost, are used throughout the later units on money, income determination, the budget and the open economy.

Key ideas

• Final goods, intermediate goods, capital goods and consumption goods.
• Stocks are measured at a point of time; flows over a period of time.
• The circular flow shows that production, income and expenditure are equal.
• National income can be measured by the value added, income or expenditure method.
• Aggregates differ by depreciation (gross vs net), net factor income from abroad (domestic vs national) and net indirect taxes (market price vs factor cost).
• Real GDP removes the effect of price changes; the GDP deflator links nominal and real GDP.
• GDP is an imperfect index of welfare.

How to prepare

Memorise the inter-relationships between GDP, GNP, NDP and NNP at market price and factor cost, and practise many short numericals on them. Learn what is and is not included in national income (transfer payments, second-hand goods, imputed rent, own-account production). Expect both calculation questions and "which of these is included" questions.