National Income Accounting

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What is 'National Income Accounting'

National income accounting refers to mathematical system or methodology for collecting data that a government employs to arrive at an aggregate measure of the level of its economic activity over a specified time period. National income accounting records the total dollar value of activity in accounts, such as revenues earned by domestic corporations, wages paid to both foreign and domestic workers, consumer spending on goods and services, and income taxes, along with expenditures and taxes paid by corporations.

BREAKING DOWN 'National Income Accounting'

The data collected through national income accounting provides detailed information that economists or statisticians then use to calculate key economic measures that indicate the health or strength of an economy, and to estimate future economic growth.

National income accounting is not an exact science, but it provides clear indications of how and where monies are being generated and spent within an economy. It also offers helpful insights into how well an economy is performing overall. The key metrics calculated through using national income accounting data include unemployment and non-farm payroll figures, gross domestic product (GDP), gross national product (GNP), gross private domestic investment, and gross national income (GNI). Governments employ these metrics in making basic economic or monetary policy decisions to stimulate optimal economic growth and stability.

The most frequently used indicator of aggregate economic activity derived from national income accounting is GDP, the total dollar value of all goods and services produced in an economy over a given time frame. GDP reflects the total market value of goods and services produced, regardless of whether all goods and services are purchased by a final consumer during the time frame being evaluated. GDP is not all-inclusive, as it does not include economic activity outside of regular marketplace channels. It excludes government welfare payments and economic activity in the shadow economy.

Two Approaches: Expenditures and Income

There are two basic approaches that are used in collecting national income accounting data: the expenditure approach and the income approach. The expenditure approach focuses on total government, business and consumer spending statistics for a given time frame, while the income approach focuses on total business and individual income for the specified time period, including income from labor, rental income, interest income and corporate profits.

For example, the computer industry can be evaluated either using the total expenditures on computers for the year or by looking at the total costs, such as parts, labor and interest expenses, required to produce all the computer hardware and software for the year. Theoretically, the two approaches should produce equal results, but in practice they will yield slightly different totals.

National income accounting provides a quantitative measure of economic activity. It is not intended to be used as a qualitative measure to evaluate, for example, overall consumer or wage earner satisfaction.

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