National Income Accounting

What Is National Income Accounting?

National income accounting is a bookkeeping system that a government uses to measure the level of the country's economic activity in a given time period. Accounting records of this nature include 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.

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 monies are being generated and spent. When combined with information regarding the associated population, data regarding per capita income and growth can be examined over a period of time.

Some of the metrics calculated by using national income accounting include the gross domestic product (GDP), gross national product (GNP), and gross national income (GNI). The 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 of time.

Special Considerations

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

For example, the U.S. uses information regarding the current GDP in the formation of various policies. During the financial crisis of 2008, the GDP began to suffer as increased market volatility and shifting supply and demand affected consumer spending and employment levels. As a result, President Barack Obama, after taking office in 2009, instituted an economic stimulus package in response.

As an example, the basic accounting identity for GDP, sometimes known as the national income identity, is computed using the following formula:

National Income Accounting vs. Economic Policy

The quantitative information associated with national income accounting can be used to determine the effect 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.

The data can provide guidance regarding inflation policy and can be especially useful in the transitioning economies of developing nations, as well as statistics regarding production levels as related to shifting labor forces.

This data is also used by central banks to set and adjust monetary policy and affect the risk-free rate of interest that they set. Governments also look at figures such as GDP growth and unemployment to set fiscal policy in terms of tax rates and infrastructure spending.

Criticism of National Income Accounting

The accuracy of analysis relating to national income accounting is only as accurate as the data collected. Failure to provide the data in a timely fashion can render it useless in regard to policy analysis and creation.

Additionally, certain data points are not examined, such as the impact of the underground economy and illegal production. This means the activities are not reflected in the analysis even if their effect on the economy is strong. As a result, certain national accounts such as GDP or the consumer price index (CPI) of inflation have been criticized on the grounds that they do not accurately capture the real economic condition of the economy.