What is national accounting?

National income accounting refers to the set of methods and

principles that are used by the government for measuring
production and income, or in other words economic activity of
a country in a given time period.
The various measures of determining national income are GDP
(Gross Domestic Product), GNP (Gross National Product), and
NNP (Net National Product) along with other measures such
as personal income and disposable income.
Table of Content :
GDPGNPNNPFunctions
The importance of national income accounting is that it is
helpful in facilitating techniques and procedures for
measurement of output and income at the aggregate level. It
is a process of preparing national income accounts that is
based on the principles of double entry system of business
accounting.
National income accounting helps in summarising the
economic performance of a country by measuring the national
income aggregates for the year.
The government policies are framed on the basis of the data
obtained from national income accounting.

What is the national income accounting equation?

National income accounting equation is an equation that
shows the relationship between income and expense of an
economy and other categories. It is represented by the
following equation:
Y = C + I + G + (X – M)
Where
Y = National income
C = Personal consumption expenditure
I = Private investment
G = Government spending
X = Net exports
M = Imports
The most important metrics that are determined by national
income accounting are GDP, GNP, NNP, disposable income,
and personal income. Let us know more about these concepts
briefly in the following lines.

Gross Domestic Product (GDP)

The most important metric that is determined by national
income accounting is GDP or the gross domestic product. GDP
is defined as the total monetary or the market value of all the
final goods and services that are produced within the
geographical boundaries of a country.
GDP works as a scorecard that reflects the economic health of
a country. It is calculated on an annual basis. GDP helps in
estimating the growth rate of a country. GDP can be calculated
using the three methods, which are expenditures method,
production method, and income method.
The other indicators of national income are derived from GDP.
GDP can be calculated by the following two methods:
1. Expenditure approach
2. Income approach
Calculation of GDP by expenditure approach is,
GDP = C + I + G + (X – M)
Where
GDP = Gross domestic product
C = Personal consumption expenditure
I = Private investment
G = Government spending
X = Net exports
M = Imports
Income approach calculation
GDP = Private consumption + Gross investment + Government
investment + Government spending + (Exports – Imports)
Gross National Product (GNP)
Gross national product or GNP is a measure of the total value
of all the finished goods and services that is produced by the
citizens of a country irrespective of their geographic location.
It calculates only the final or finished goods.
It signifies how much the citizens of a country are contributing
to the economy. It does not include income earned by foreign
nationals within the country.
GNP is calculated using the following formulae:
GNP = C + I + G + X + Z
Where
C = Consumption
I = Investment
G = Government
X = Net exports
Z = Net factor income from abroad

Net National Product (NNP)

Net national product or NNP is the total value of all goods and
services that are produced in a country during a given period
of time minus the depreciation. It is represented as follows:
NNP = GNP – Depreciation

Methods of National Income Accounting

There are three methods of measuring national income. They
are as follows:
1. Product method: In this method, a country’s national
income can be calculated by adding the output of all the
firms in the economy to determine the nation’s output.
2. Income method: This method is used to calculate
incomes generated by production. It includes income
from employment, rent obtained for buildings, patents,
and copyrights, return on capital from the private sector
and public sector, depreciation, etc.
3. Expenditure method: In this method, the national income
is calculated by adding all the expenditures that are done
for purchasing the national output.

Functions of National Income Accounting

The basic functions of national income accounting are as
follows:
1. To determine the economic status of a country.
2. To provide a basis of evaluation and reviewing of policies
that are under implementation.
Uses of National Income Accounting
Uses of national income accounting are as follows:
1. It reflects the economic performance of an economy and
shows its strengths and weaknesses.
2. It helps to determine the structural changes that are
appearing in the economy.
3. It helps in comparing nations based on national income.
 4. It shows the contribution of each sector towards the
growth of the economy.

MACROE

What is macroeconomics?

Macroeconomics is a branch of economics that depicts a

substantial picture. It scrutinises itself with the economy at a
massive scale and several issues of an economy are
considered. The issues confronted by an economy and the
headway that it makes are measured and apprehended as a
part and parcel of macroeconomics. When one speaks of the
issues that an economy confronts, inflation, unemployment,
increasing tax burden, etc., are all contemplated. This makes
it apparent that macroeconomics focuses on large numbers.
It studies the association between various countries regarding
how the policies of one nation have an upshot on the other. It
circumscribes within its scope, analysing the success and
failure of government strategies.

Concepts covered under macroeconomics

A capitalist nation
A capitalist country is distinguished by sub-urbanised and
voluntary conclusions for economic planning instead of the
consolidated political practices. There are a few aspects of a
capitalist financial structure (Economy) mentioned that would
provide a better intuition into the concept. The attributes of a
capitalist nation are as follows:
1. Liberty of customers to pick between goods and services.
2. The privilege of individuals to set up a business to supply
goods and services.
3. There is a finite interference of the government.
4. Market forces regulate the distribution of goods.
Investment expenditure
As the name says it all, it is the money consumed towards
charges to create investments. In other words, it is the money
that the family circle (households) and enterprises spend on
capital goods. It plays a decisive role in macroeconomic
pursuit for business cycles and economic enhancement in the
long run.
In short, the investment expenditure is proficient of creating
additional income and fosters employment in a nation.
The following are the types of investments:
1. Autonomous investment
2. Financial investment
3. Real investment
4. Gross investment
5. Net investment
Revenue: Revenue is the total income of an entity through
sale of goods and proffering its services to the customers.
Revenue can be operating or non-operating. The significance
of revenue and its acknowledgements is better
comprehended if we are well aware of the aspects that are
contemplated while deciding the GDP.
The index of the economic health of a nation is measured
through the GDP (gross domestic product).

Three types of macroeconomic policies are as follows:

1. Fiscal policy
2. Monetary Policy
3. Supply side policies

Macroeconomic Policy: Meaning, Types, How It Works

Macroeconomic policy is a government plan and action to

influence the economy as a whole. The policy is to achieve
macroeconomic targets such as:

 Healthy and sustainable economic growth

 Low and stable inflation rate
 Equilibrium in the balance of payments
 Full employment
Macroeconomic policy differs from the microeconomic
policy. The latter focuses on specific economic agents, for
example, raising excise in the tobacco product.

Types of macroeconomic policy

The three main types of macroeconomic policies are:

1. Fiscal policy
2. Monetary policy
3. Supply-side policy

The first two influence the economy through the aggregate

demand side. While the last affects aggregate supply.

Fiscal policy uses budget instruments. Governments can

change taxes and their spending to influence the economy.

Meanwhile, the monetary policy focuses on the money supply.

The key tools of monetary policy include policy rates, reserve
requirements, and open market operations.

The supply-side policy seeks to improve the competitiveness

and efficiency of the free market. To do this, the government
introduces privatization, deregulation, and antitrust policies.
Other policies enhance the quality and quantity of the
productive capacity of the economy, for example, by
improving education, research and development of advanced
technology, and infrastructure.

Contractionary and expansionary policies

In general, monetary and fiscal policy can be expansionary or

contractionary policies. Both policies ensure the economy to
operate close to its potential level. By doing so, the economy
avoids the adverse effects of the business cycle, such as
hyperinflation and recession.
Expansionary policies drive up economic growth.
Governments usually do it when economic growth is weak or
recession. To do this, governments could launch several
options, such as:

 Reducing tax rates

 Increasing government spending
 Cutting interest rates
 Lowering reserves requirement ratio
 Conducting open market operations by buying
government securities.
Those options increase aggregate demand and stimulate
economic growth. For example, when interest rates fall, the
cost of new loans becomes cheaper. That should encourage
households to increase the consumption of goods and
services. Increasing demand helps businesses to increase their
output.

Conversely, contractionary policies seek to overcome the

adverse effects of high inflationary pressures. High inflation
usually accompanies strong real GDP growth. The economy
operates above its potential output. During this period, the
economy experiences overheated.

High inflation is endangering the economy because

the purchasing power of money is falling. It
requires government intervention. To moderate inflation, the
government can take several alternatives, including:

 Raising tax rates

  Cutting its spending
 Raising interest rates
 Increasing the mandatory reserve ratio
 Open market operations by selling government
securities.
Those alternatives reduce aggregate demand and diminish the
real GDP growth and inflation rate.

Discretionary and automatic stabilizer policies

Economists divide fiscal policy into two: discretionary policy

and automatic stabilizer. Discretionary policies require explicit
intervention.

In contrast, automatic stabilizer policy does not require

explicit government action. It works countercyclical, which
decreases during economic expansion and increases during
economic contraction.

Transfer payments, such as unemployment benefits, are

examples of automatic stabilizer instruments. During a
recession, unemployment benefits increase as
the unemployment rate rises. In contrast, as the economy
expands, unemployment benefits decrease because of a low
unemployment rate.
Introduction
A business cycle refers to various stages of rising and fall in the
economy. A business cycle is also known as an economic
cycle or trade cycle. The various stages in a business cycle reflect
the fluctuations in economic activity that an economy undergoes
typically in a long period.

Business cycles are characterized by boom in one period and

collapse in the subsequent period in the economic activities of a
country.

These fluctuations in the economic activities are termed as

phases of business cycles.

The fluctuations are compared with ebb and flow. The upward
and downward fluctuations in the cumulative economic
magnitudes of a country show variations in different economic
activities in terms of production, investment, employment,
credits, prices, and wages. Such changes represent different
phases of business cycles.

The different phases of business cycles are shown in

Figure-1:

There are basically two important phases in a business cycle that

are prosperity and depression. The other phases that are
expansion, peak, trough and recovery are intermediary phases.
Figure-2 shows the graphical representation of different
phases of a business cycle:

As shown in Figure-2, the steady growth line represents the

growth of economy when there are no business cycles. On the
other hand, the line of cycle shows the business cycles that move
up and down the steady growth line. The different phases of a
business cycle (as shown in Figure-2) are explained below.

1. Expansion:

The line of cycle that moves above the steady growth line
represents the expansion phase of a business cycle. In the
expansion phase, there is an increase in various economic factors,
such as production, employment, output, wages, profits, demand
and supply of products, and sales.

In addition, in the expansion phase, the prices of factor of

production and output increases simultaneously. In this phase,
debtors are generally in good financial condition to repay their
debts; therefore, creditors lend money at higher interest rates.
This leads to an increase in the flow of money.
In expansion phase, due to increase in investment opportunities,
idle funds of organizations or individuals are utilized for various
investment purposes. Therefore, in such a case, the cash inflow
and outflow of businesses are equal. This expansion continues till
the economic conditions are favorable.

2. Peak:

The growth in the expansion phase eventually slows down and

reaches to its peak. This phase is known as peak phase. In other
words, peak phase refers to the phase in which the increase in
growth rate of business cycle achieves its maximum limit. In peak
phase, the economic factors, such as production, profit, sales, and
employment, are higher, but do not increase further. In peak
phase, there is a gradual decrease in the demand of various
products due to increase in the prices of input.

The increase in the prices of input leads to an increase in the

prices of final products, while the income of individuals remains
constant. This also leads consumers to restructure their monthly
budget. As a result, the demand for products, such as jewellery,
homes, automobiles, refrigerators and other durables, starts
falling.

3. Recession:

As discussed earlier, in peak phase, there is a gradual decrease in

the demand of various products due to increase in the prices of
input. When the decline in the demand of products becomes
rapid and steady, the recession phase takes place.

In recession phase, all the economic factors, such as production,

prices, saving and investment, starts decreasing. Generally,
producers are unaware of decrease in the demand of products
and they continue to produce goods and services. In such a case,
the supply of products exceeds the demand.

Over the time, producers realize the surplus of supply when the
cost of manufacturing of a product is more than profit generated.
This condition firstly experienced by few industries and slowly
spread to all industries.
This situation is firstly considered as a small fluctuation in the
market, but as the problem exists for a longer duration,
producers start noticing it. Consequently, producers avoid any
type of further investment in factor of production, such as labor,
machinery, and furniture. This leads to the reduction in the
prices of factor, which results in the decline of demand of inputs
as well as output.

4. Trough:

During the trough phase, the economic activities of a country

decline below the normal level. In this phase, the growth rate of
an economy becomes negative. In addition, in trough phase, there
is a rapid decline in national income and expenditure.

In this phase, it becomes difficult for debtors to pay off their

debts. As a result, the rate of interest decreases; therefore, banks
do not prefer to lend money. Consequently, banks face the
situation of increase in their cash balances.

Apart from this, the level of economic output of a country

becomes low and unemployment becomes high. In addition, in
trough phase, investors do not invest in stock markets. In trough
phase, many weak organizations leave industries or rather
dissolve. At this point, an economy reaches to the lowest level of
shrinking.

5. Recovery:

As discussed above, in trough phase, an economy reaches to the

lowest level of shrinking. This lowest level is the limit to which an
economy shrinks. Once the economy touches the lowest level, it
happens to be the end of negativism and beginning of positivism.

This leads to reversal of the process of business cycle. As a result,

individuals and organizations start developing a positive attitude
toward the various economic factors, such as investment,
employment, and production. This process of reversal starts from
the labor market.
Consequently, organizations discontinue laying off individuals
and start hiring but in limited number. At this stage, wages
provided by organizations to individuals is less as compared to
their skills and abilities. This marks the beginning of the recovery
phase.

In recovery phase, consumers increase their rate of consumption,

as they assume that there would be no further reduction in the
prices of products. As a result, the demand for consumer
products increases.

In addition in recovery phase, bankers start utilizing their

accumulated cash balances by declining the lending rate and
increasing investment in various securities and bonds. Similarly,
adopting a positive approach other private investors also start
investing in the stock market As a result, security prices increase
and rate of interest decreases.

Price mechanism plays a very important role in the recovery

phase of economy. As discussed earlier, during recession the rate
at which the price of factor of production falls is greater than the
rate of reduction in the prices of final products.

Therefore producers are always able to earn a certain amount of

profit, which increases at trough stage. The increase in profit also
continues in the recovery phase. Apart from this, in recovery
phase, some of the depreciated capital goods are replaced by
producers and some are maintained by them. As a result,
investment and employment by organizations increases. As this
process gains momentum an economy again enters into the phase
of expansion. Thus, a business cycle gets completed.

Stages in a Business Cycle

A business cycle generally lasts for 5 ½ years. The various stages
in the business cycle are:
1. Expansion: Expansion is the first stage in a new business cycle.
A phase of expansion reflects an increase in income, employment,
production, and sales. Money flows into the economy more easily,
and it is a boom period for investments. People take on debt and
repay the same in time.

2. Peak: The second stage is the 'Peak' stage when all the
economic indicators are at their peak stage of growth. At this stage,
the economy is said to peak out. Prices hit their highest level after
which the economy stops growing. At this stage, people and
enterprises restructure their businesses as the economy peaks out
and reverse the growth trend.

3. Recession: The stage of contraction of the economy is called a

recession. In this stage, there is a slowdown in production and low
growth in sales and income. There may be a decline or negative
growth in sales and consequent unemployment.

4. Depression: The growth continues to decline with an increase in

unemployment. Industrial production shows a decline, business
enterprises and consumers are unable to secure funds on credit. A
reduction in business can also lead to bankruptcies. The period is
also marked by low business and consumer confidence.

5. Trough: Trough is the end of the depression stage leading to the

path of recovery.

6. Recovery: Recovery is the stage of a turnaround of the

economy. The prices are low due to the earlier phase of
depression. The low prices generally lead to an increase in demand
for goods, augmenting production leading to a revival in industrial
production. As a result, there is a growth in credit. There is a
consequent increase in employment and incomes too.