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.

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.

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.

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.

Fig. 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.

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:

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

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.

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.

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

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

National Accounts Example

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

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.

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

Fig. 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.