What Is National Income Accounting? How It Works and Examples

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 money is 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.

In the U.S., the Bureau of Economic Analysis (BEA) prepares and publishes data on national income accounts. Examples of national income accounts published by the BEA include domestic product and income, personal product and income, savings and investments, and foreign transactions.

Uses of National Income Accounting

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 of 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. The commonly used formula for calculating GDP—the expenditure approach—is also known as the national income accounting equation. The formula is:

GDP = C + G + I + NX

where:

• C = consumption;
• G = government spending;
• I = Investment
• NX = net exports (exports - imports)

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.

Globally, the International Monetary Fund (IMF), the World Bank, and the Organization for Economic Cooperation and Development (OECD) put together national income accounting information and publish it.

Criticisms 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 these activities are not reflected in the analysis even if their effect on the economy is strong.

As a result, it can be argued that certain national accounts, such as GDP or the consumer price index (CPI) used to measure inflation do not accurately capture the real economic output of the economy.

The Bottom Line

National income accounting assesses the economic activity of a nation, from wages to corporate revenues to taxes and more. The information allows policymakers, economists, and investors to make decisions in their respective fields based on the data analyzed.

Without understanding the economic data of a nation, it would be hard for policymakers to adjust monetary policy, for example, for investors to gauge where stocks may move, and for economists to understand how economic factors impact all facets of life.