Macroeconomics Key Features of National

Macroeconomics

Key Features of National Accounts

It can be evoked that the idea of circular flow of income makes it obvious that within a given time period, the amount of expenditure within an economy should be equal to the value of output sold in return should be equal to the incomes paid to the owners of the factors that were employed to produce the output thus generated. The relatedness between the expenditure, output and income is crucial. Hence it can be stated that Expenditure is directly proportional to Output which is in turn directly proportional to Income. The uniqueness of national accounts is the fundamental principle that is essential in the estimation of GDP as it indicates that the net value to output generated could be calculated in any one of the process that would obviously arrive at the same result.

A i) Income Method: - the net of the all factor incomes including rent, wages, interest, profits is taken into account. However, incomes for instance pensions, social benefits, grants are not taken into account. (ii) Output method: Under this method the aggregate of the value additions done by every firm within the economy is estimated. Value added = sales minus purchases of working capital including components, materials etc. It is worthwhile to note that the purchase of fixed capital inputs like machinery, buildings etc. are excluded as these are not consumed during the process of production immediately. The value additions done are used instead of value of sales in order to avoid duplicity of calculation. (ii) Expenditure method: The net of all final expenditure on consumer goods and capital goods incurred by the domestic sector, firms, government and residents of foreign nations is estimated. Intermediate expenses incurred by firms on working capital inputs are taken out of consideration once again to avoid duplicity of counting. (National Income Accounting)

At this point it is pertinent to explore briefly into the total system of national accounts and specifically at the financial linkages between the various sectors of the economy. For the purpose of building the national accounts, the economy has been subdivided into four basic sectors. These are the (a) Personal Sector - which primarily constitutes the household sector (b) Corporate sector - comprising of Companies and Financial Institutions - F.I.s and the public corporations - General Government sector - comprising of Central and Local Government authorities (d) Foreign sector - that comprises of all individuals, firms and government bodies outside USA. In case of each of these sectors there is the identical set of basic accounts that keep an account of all the receipts and outflow of that sector regardless of they being factor incomes, transfers, taxes, current or capital expenditures.

The two primary accounts worth considering are (i) Income/expenditure account which maintains the inflow of current factor incomes, transfers and taxes. The excess of receipts over expenditure is stated to be the savings of the sector. (ii) Capital account: - Capital account records the inflow of savings from the income/expenditure account and the transfer of capital against the outflow of capital spending, transfers and taxes imposed. The balance is the financial surplus of the sector that is even called as the net acquisition of financial assets. To put it differently, it is the amount of total lending or borrowing that the sector makes within the given period of time. It can also be negative which is known as deficit. The most vital point to consider is that going by the definition the aggregate of every sector's financial surplus/deficit must be equal to zero. This is due to the fact that borrowings by deficit sectors must be matched by an equal lending by sectors which are surplus. (National Income Accounting -the Overall Systems of Accounts)

GDP is the market value of all the final goods and services which is produced in the nation during a particular year. It does not include production overseas by U.S. companies but includes the production facilities in U.S. By overseas companies operating in U.S. like for example Toyota Motors. On the other hand GNP is the market values of all goods and services produced by domestically owned factors some of which might be situated overseas. It is estimated from GDP by adding on net property income from overseas. Net National Product or NNP is calculated by deducting the depreciation of the capital stock of the nation from depreciation. In a majority of the developing economies GDP and GNP do not deviate a lot. (an Introduction to National Income Accounts)

Aggregate Income and Aggregate Output: