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National Accounts

National Accounts

Let's say you run a business, which means you want to make profits. You would need to compute all your transactions toward a final figure which you have in your purse at the end of each business season - this is the concept of national accounts but at the macroeconomic level. Economists are concerned with breaking down the final income of the country to accurately determine the performance of the economy. This is why we are here; we are concerned with the national accounts that combine to form the country's overall account - the gross domestic product. Read on so that we learn together!

Meaning of National Account

The national account simply refers to the value of all the transactions that take place within an economy. It is how economists account for the country's economic performance.

The national account refers to accounting for the value of all transactions that take place within an economy.

All transactions that take place within an economy, when valued, add up to the gross domestic product or GDP of that economy. Therefore, we can say that the GDP is the overall national account of any economy. However, to arrive at the overall national account, economists have several subaccounts which explain different areas of the economy's performance.

National Accounts in Economics

National accounts in economics refer to the subaccounts that combine to give us the main national account - the GDP. These national accounts are necessary because they help economists understand the economy's performance in detail.

National accounts (or other national accounts) in economics refer to the subaccounts that combine to form the GDP.

These accounts are derived by economists by adjusting the GDP in different ways. To give you a clear idea of what the national accounts are, consider the following example.

A coffee farm sells raw coffee, processed coffee, and packaged coffee. At the end of the day, the farm measures its performance by looking at how much it has made overall. However, this could be misleading because even if the farm is making profits, it could be that one part of the business, say, packaged coffee is running at a loss. The other parts of the business just need to make profits high enough that a loss in another part of the business is covered up. Therefore, having several subaccounts under the main account will enable the farm to look at its performance in detail.

Types of National Accounts

There are several types of national accounts that fall under the GDP of an economy. However, we will focus on 4 commonly used types. These four types of national accounts are:

  1. Net Domestic Product (NDP) - This refers to the new output available for consumption and addition to the capital stock after depreciation.
  2. National Income (NI) - This refers to all income earned in the economy. In other words, all income worked for falls under national income.
  3. Personal Income (PI) - This refers to all income, both worked for (earned) and not worked for (unearned). For instance, even though people do not work for stimulus checks, they fall under personal income.
  4. Disposable Income (DI) - Disposable income refers to how much personal income households have left after they pay their personal income taxes.

National Accounts Disability payments for veterans fall under personal income StudySmarterFig. 1 - Disability payments for veterans fall under personal income

Components of National Income Accounts

Here, we will discuss the components of the national income accounts and see how each one is derived. Sit tight!

National Accounts: Net Domestic Product

The net domestic product is a way for economists to account for the capital goods used in production every year. It shows us how much output is available for consumption as well as the addition to the capital stock at the end of the year.

Calculating the net domestic product is simple; we subtract the consumption of fixed capital or depreciation from the GDP.

The formula is as follows:

\(\hbox{NDP}=\hbox{GDP}-\hbox{Depreciation}\)

The NDP is simply the GDP after economists adjust it for depreciation. Let's look at a quick example.

Use Table 1 to calculate the NDP of Country A:

Item$ billion
GDP5,000
Consumption of fixed capital (Depreciation)50

Table 1 - NDP Calculation Example

Using the formula:

\(\hbox{NDP}=\hbox{GDP}-\hbox{Depreciation}\)

We have:

\(\hbox{NDP = \$5,000 billion - \$50 billion = \$4,950 billion}\)

National Accounts: National Income

Households in the country are the suppliers of the factors of production, and it is necessary to determine how much they earn as part of the GDP. National income is how economists do this. National income includes all the income earned by the resources owned by households in an economy, whether domestic or foreign-based. National income also includes production and import taxes.

We find national income by subtracting the statistical discrepancy and adding net foreign factor income to the NDP.

Mathematically, this is:

\(NI=NDP-\hbox{statistical discrepancy}+\hbox{net foreign factor income}\)

Statistical discrepancies are how economists account for errors in recording figures and other issues such as misreporting. Read Measured GDP to learn more.

Here, an important thing to note is that every country adds its foreign-based resources in calculating national income, so we should remember to subtract the income earned by foreigners in the country in question. Let's look at an example.

Use Table 2 to calculate the NI of Country A:

Item$ billion
NDP4,950
Statistical discrepancy50
Net foreign factor income500

Table 2 - NI Calculation Example

Using the formula:

\(NI=NDP-\hbox{statistical discrepancy}+\hbox{net foreign factor income}\)

We have:

\(\hbox{NI = \$4,950 billion - \$50 billion + \$500 billion = \$5,400 billion}\)

Read our article on Measured GDP to learn more about calculating national income.

National Accounts: Personal Income

Households in the country do not only earn income, but they also receive some income for free (for example, stimulus checks), and these are referred to as transfer payments. In addition to this, some income is not even received by households (for example, production and import taxes).

We must account for all these to determine personal income. Economists do this by adding the transfer payments to the national income and subtracting the income not received by households. Mathematically, we have:

\(PI=NI-\hbox{income not received}+\hbox{transfer payments}\)

Let's look at a quick example now.

Use Table 3 to calculate the PI of Country A:

Item$ billion
NI5,400
Transfer payments3,000
Production and Import Taxes2,500

Table 3 - PI Calculation Example

Using the formula:

\(PI=NI-\hbox{income not received}+\hbox{transfer payments}\)

We have:

\(\hbox{PI = \$5,400 billion - \$2,500 billion + \$3,000 billion = \$5,900 billion}\)

National Accounts: Disposable Income

Disposable income includes personal income minus personal taxes. The taxes that fall under personal taxes are

personal income taxes, personal property taxes, and inheritance taxes. When households pay their personal taxes, what they have left is disposable income. Income that is free to spend! Households usually divide disposable income into savings and consumption.

The formula for disposable income is as follows:

\(DI=PI-\hbox{Personal taxes}\)

Let's calculate it in this quick example

Use Table 4 to calculate the DI of Country A:

Item$ billion
PI5,900
Personal Taxes1,000

Table 4 - DI Calculation Example

Using the formula:

\(DI=PI-\hbox{Personal taxes}\)

We have:

\(\hbox{DI = \$5,900 billion - \$1,000 billion = \$4,900 billion}\)

The discussed accounts form the income or allocation side of the GDP.

Read The Income Approach to Measuring National Income to learn more!

National Accounts Example

Now, let's look at one example by calculating national accounts.

Use Table 5 to calculate the NDP and NI of Country A:

Item$ billion
GDP4,000
Consumption of fixed capital (Depreciation)50
Statistical Discrepancy300
Net foreign factor income2000

Table 5 - NDP and NI Calculation Example

First, we need to find the NDP using:

\(\hbox{NDP}=\hbox{GDP}-\hbox{Depreciation}\)

We have:

\(\hbox{NDP = \$4,000 billion - \$50 billion = \$3,950 billion}\)

Now that we have the NDP, we can use it to calculate the NI using:

\(NI=NDP-\hbox{statistical discrepancy}+\hbox{net foreign factor income}\)

We have:

\(\hbox{NI = \$3,950 billion - \$300 billion + \$2,000 billion = \$5,650 billion}\)

National Accounts in Practice

The national accounts of the USA in the final quarter of 20211 are summarized in Table 1 and illustrated in Figure 2 below.

AccountAmount ($ Billion)
Gross domestic product24349.1
Net domestic product20364.3
National income20669.9
Personal income21162.1
Disposable personal income18356.1

Table 1 - USA National Accounts 2021. Source: Bureau of Economic Analysis1

National Accounts USA National Accounts 2021 StudySmarterFig. 2 - USA National Accounts 2021. Source: Bureau of Economic Analysis1

Table 1 and Figure 2 show that the USA reported a GDP of $24,349.1 billion in 2021. The remaining national accounts, including net domestic product, national income, personal income, and disposable income, are all shown in Figure 2 according to their monetary values.

National Accounts - Key takeaways

  • The national account refers to accounting for the value of all transactions that take place within an economy.
  • The Net Domestic Product (NDP) refers to the new output available for consumption and addition to the capital stock.
  • National Income (NI) refers to all income earned in the economy.
  • Personal Income (PI) refers to all income, both worked for and not worked for, in an economy.

  • Disposable Income (DI) refers to how much personal income households have left after they pay their personal income taxes.


References

  1. Bureau of Economic Analysis, National Income and Products Accounts, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&1921=survey&1903=316#,

Frequently Asked Questions about National Accounts

National accounts include the subaccounts that combine to form the GDP.

National accounts are based on economic activity in an economy.

National accounts help economists explain economic performance in detail.

National accounts (or other national accounts) in economics refer to the subaccounts that combine to form the GDP.

The four commonly used national accounts are net domestic product (NDP), national income (NI), personal income (PI), and disposable income (PI).

Final National Accounts Quiz

Question

What is the national account?

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Answer

The national account refers to accounting for the value of all transactions that take place within an economy.

Show question

Question

What are national accounts?

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Answer

National accounts (or other national accounts) in economics refers to the subaccounts that combine to form the GDP.

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Question

What does NDP stand for?

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Answer

Net Domestic Product

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Question

Define net domestic product.

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Answer

This refers to the new output available for consumption and addition to the capital stock after depreciation.

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Question

National income includes all income, both earned and not earned.

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Answer

False

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Question

What is personal income?

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Answer

Personal income refers to all income, both those worked for and those not worked for in an economy.

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Question

What is disposable income?

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Answer

Disposable income refers to how much personal income households have left after they pay their personal income taxes.

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Question

Disposable income includes only earned income.

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Answer

False

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Question

Define national income.

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Answer

National income refers to all income earned in the economy.

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Question

Households spend their national income on consumption and savings.

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Answer

False

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Question

Households are free to use disposable income as they please.

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Answer

True

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Question

What is the formula for the NDP?

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Answer

\(NDP=GDP-\hbox{consumption of fixed capital (depreciation)}\)

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Question

What is the formula for NI?

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Answer

\(NI=NDP-\hbox{statistical discrepancy}+\hbox{net foreign factor income}\)

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Question

Personal taxes are subtracted from personal income to determine disposable income.

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Answer

True

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Question

Income not earned but given to households are referred to as transfer payments.

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Answer

True

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