National income accounting

National Income Accounting via the expenditure approach in the USA.

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National Income Accounting is a statistical procedure used to measure and aggregate economic activity within a country. National Income Accounts (NIAs) are fundamental in conducting macroeconomic policy and understanding macroeconomics more generally.

History

National Income accounting can be traced to the early modern period in England. In the 1930s it became much more formalized when economist Simon Kuznets published his work on national income for the United States Congress. Kuznets had developed time series of national income in order to develop a quantitative basis for studying and measuring economic growth and the shifts in production from agriculture to industry to services. As the 20^th century progressed, national income accounting was refined and improved into what it is today.

Expenditure approach

The expenditure approach is a means by which national income is calculated by aggregating total spending. All final purchases are tallied within a given time-frame in a specified location. Common expenditure approach methods include

• Gross Domestic Product
• Net Domestic Product
• Gross National Product

Income approach

The income approach is a means by which national income is computed from people's incomes. The actual earnings of the citizens and firms are totaled over a period of time in a specified location. Examples include

• Gross Domestic Income
• Net Domestic Income
• Gross National Income
• Net National Income.

Application

NIA is important in assessing the health and growth of a nation's economy. They are also vital in policy making, as NIAs serve as a feedback mechanism to understand the effectiveness of monetary and fiscal policy. Knowing how big an economy is and how fast it has been growing lets policymakers understand the impacts of taxes, spending, trade, and monetary policy.

Potential inaccuracies

Obvious issues with NIAs may come from governments manipulating data to exaggerate growth rates or income levels. Other problems arise from issues in calculating inflation, especially over a long period of time.