National Income Accounting : Meaning, Functions and Main Uses

Read this article to learn about the national income accounting and its meaning, functions and main uses!

National Income Accounting facilitates the task of measurement as it provides a set of procedures and techniques for measurement of income and output at aggregate level.

We study national income accounting for two reasons because such accounts (i) provide the formal structure for our macro theory model and (ii) enable us to learn a few hallmark numbers which help characterise the economy.

(a) Meaning:

National Income Accounting is a method of preparing and presenting national income accounts based on the principle of double entry system of business accounting. Macroeconomics deals with the study of aggregates covering the entire economy A framework of measurement procedures is required to find these aggregates. National income accounting facilitates the measurement of macro aggregates.

According to D.C. Colander, “National income accounting is a set of rules and definitions for measuring economic activity in the aggregate economy.” It tries to summarise the performance of an economy by measuring national income aggregates in a year. It provides the standards by which economic activity of a country could be assessed.

It is on the basis of this appraisal that a government forms its policies and programmes to maximise material welfare of the people. And this is the basic purpose of national income accounting. Structure of the macro economy is given by the circular flow of income and output. National income accounting has its foundation in circular flow model.

(b) Functions:

Basic functions of national income accounting are mainly two:

(i) To identify specific economic achievements of a country and

(ii) To provide an objective basis of evaluation and review of policies under implementation.

The data so arrived at enables us to understand, analyse and interpret the working of an economy. That is why the subject of macroeconomics should begin with a study of national income accounting.

(c) Main Uses of National Income Accounting:

These are as under:

(i) It indicates performance of the economy signifying economy’s strength and failures.

(ii) It helps to find out structural changes in the economy For instance, in India, proportional share of primary (agricultural) sector in national income is declining whereas those of secondary (industrial) sector and tertiary (services) sector are rising.

(iii) It reflects how national income is shared among various factors of production. In this context, it is especially helpful to trade unions in making rational analysis of remuneration that the labour is getting.

(iv) It helps in making comparison among nations in respect of national income and per capita income which lead us to make suitable changes in plans and approaches to achieve rapid economic development.

(v) National income statistical data reflect the specific contribution of individual sectors and their growth over time.

(vi) It is helpful to UNO which formulates welfare plans for different countries, especially for underdeveloped and developing countries.

(vii) It has several uses for economic policy and research.

Simply put, national income data, in a way, is manifestation of material results of human activity in an economy. National income accounting demands an understanding of the structure of the macro economy which is exposed through a Circular Flow of Income and Product.