A Complete Guide on National Income Accounting (NIA) in 2023- The Way of tracking Nation’s Wealth

Introduction

National Income Accounting (NIA)plays an important role in understanding the economic growth chart of a country. It provides a platform to evaluate the total quantity of goods and services produced in within a geographical boundary of a country in a particular period of time.

In this article, we will deliver you a valuable information about national income accounting, methods, etc.

National Income Accounting Definition (NIA)

National Income Accounting (NIA) or we can say NIA is a method which is used to calculate the economic activity in a national economy.

or

The national income can be counted like an earning of a person or the total amount of income accumulated to a country from various economic activities in a particular year of time is known as national income accounting.

or

It is a complete transaction of goods and services in the form of money.

Or

National Income Accounting (NIA) is a set of rules which is used to measure aggregate economic activity.

In National Income Accounting (NIA) the economic activity basically depends upon four factors, which are as follows

  • Consumers(household)
  • Financial institutions
  • Manufacturers
  • Government
  • Consumers: – These are those
  • who earn income through public or private institutions
  • who pay taxes to the government
  • who deposit their savings into mutual funds, bank fixed deposits or we can say purchasing of shares, etc.
  • Financial institutions:  – These are those
  • who have surplus amount of money to invest further
  • who purchase shares of companies
  • who buy government bonds
  • Manufacturers: – These are those
  • who produce goods in large amount
  • they use their revenue through sales to pay salary to their employees
  • who also pay taxes to government
  • Government: – It is the final destination of this cycle from where money comes in from all above three and government further use it to pay wages to its employees and also use for country development.

These above 4 methods of National Income Accounting have major role in an economy of a country.

Circular flow Income diagram

This diagram shows us how money flows from households to firms and reverse from firms to households in a very simple manner.

A continuous flow of money works every year to bring growth in economy. GDP estimates this type of flow of money. GDP is known as the total expenditures made by households in the market for purchasing goods and services.

Sources of National Income Accounting (NIA)

  1. Wages
  2. Rental Income
  3. Firms Revenue after company sale
  4. Fixed deposits in banks
  5. Savings in stock market

National Income Accounting (NIA) can be calculated through three different methods, which are following

  • Output method/ value added method
  • Expenditure method
  • Income method
  • Output method / value added method: – It is the summation of all the total values calculated at different kinds of activities done to produce goods and services.
  • Expenditure method: – It is the summation of all the total expenditure calculated at different kinds of activities done to produce goods and services.
  • Income method: – It is the summation of all the total income calculated by wages, rents, savings profits.
national income accounting

Benefits / Importance / Advantages of National income Accounting (NIA)

  • Better Decision Making: – It helps in making great decisions for our economy by taking right choices for future production plans.
  • Living standard: – With the help of NIA we can evaluate growth chart of economy of any country in the world and the basis of which we can understand very easily the living standards of people in all over the world.
  • Policy making: – In this, we understand how Government makes different policies for producing goods and paying salaries to each working person.
  • Policy analysis: – There are so many advantages and disadvantages in NIA regarding economy of a country. These results further help in the analysis of government policies.
  • Budgeting policy: – In an economy one thing plays a very important role i.e.  inflation. To beat this inflation Government takes some important steps in the budget policy. By doing this Government creates a balance to minimize the volatility in income and employment systems at different stages.

Drawbacks / Disadvantages / Problems of National income Accounting (NIA)

  • Money use: – In India money exchange is done in the form of goods and services mostly in metro cities and cities but in some local areas where poor people live, transactions are done in the form of wheat or some other eating products rather than money. Hence it becomes hard to determine the exact value of National Income for its accounting.
  • Unrevealed income in ITR (Income Tax Return) file: – In India there is huge amount of people who earns income from other sources or we can say an income through illegal sources, but never show those surplus other than their taxed income in ITR file. That’s why it is not easy to define the true income of a person. Therefore, it becomes difficult to calculate the exact scenario of economy growth chart.
  • Hidden data: – There are different kinds of income sources in India. People earns money by doing some work in other people houses like sanitation, washing car, home maintenance, etc. But, in actual this type of income is never calculated into our National Income Accounting (NIA) system. Again, it gives negative impact on our economic system.

Conclusion

 As we studied above, there are several GDP measuring methods. With the help of these methods, we can expect to capture the new Growing India structure.

The Indian Economy is growing so fast and changes in Economy are so well to bring a bright future of India.

FAQ’s

  1. If GDP is measured at the price of a Base Year, then it is called?

    Answer – Constant Price

  2. The most appropriate Measure of a country’s Economic Growth is?

    Answer – Per Capita Real Income

  3. The main reason for Low Growth Rate in India, instead of High rate of savings and capital formation is?

    Answer – High Capital Output Ratio

  4. Mixed Economy means an Economy where?

    Answer – There is co-existence of public sector along with private sector

  5. How we get to know that India is Underdeveloped Economy?

    Answer – Due to High Dependency Ratio

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