National Income and Social Accounting
National income is also being measured by the social accounting
method. Under this method, the transactions among various sectors such as
firms, households, government, etc., are recorded and their interrelationships
traced. The social accounting framework is useful for economists as well as
policy makers, because it represents the major economic flows and statistical
relationships among various sectors of the economic system. It becomes possible
to forecast the trends of economy more accurately.
Under this method, the economy is divided into several sectors. A
sector is a group of individuals or institutions having common interrelated
economic transactions. The economy is divided into the following sectors
Rest of the world and
1. “Firms” undertake productive activities. Thus,
they are all organizations
which employ the factors of
production to produce goods and services
2. “Households” are consuming entities and represent the
factors of production, who receive payment for services rendered by them to
firms. Households consume the goods and services that are produced by the
Thus, firms make payment to households for their services.
Households spend money incomes they received on the goods and services produced
by the firms. This is a circular flow of money between these two groups.
3. “The Government sector” refers to the economic transactions of public bodies at
all levels, centre, state and local. In their work concerning social
accounting, Ed1ey and Peacock have defined government as a collective ‘person’
that purchases goods and services from firms. These purchases may be financed
through taxation, public borrowings, or any other fiscal means. The main
function of the government is to provide social goods like defence, public
health, education, etc. This means satisfying the collective wants of society.
However, public enterprises like Post Offices and railways are separated from
the Government sector and included as “Firms”.
4. “Rest of the world sector” relates to international economic transactions of the
country. It contains income, export and import transactions, external loan
transaction, and allied overseas investment income and payments.
5. “Capital sector” refers to saving and investment activities.
It includes the transactions of banks, insurance corporations, financial houses,
and other agencies of the money market. These are not included under “Firms”.
These agencies merely provide financial assistance to the firms’ activities.
While assessing sectoral contribution to GDP, the economy is
divided into three namely Primary, Secondary and Tertiary sectors.
National Income is considered as an indicator of the economic
wellbeing of a country. The economic progress of countries is measured in terms
of their GDP per capita and their annual growth rate. A country with a higher
per capita income is supposed to enjoy greater economic welfare with a higher
standard of living.
But the rise in GDP or per capita income need not always promote
economic welfare. The per capita income as an index of economic welfare suffers
from limitations which are stated below:
1. The economic welfare depends upon the composition of goods and
services provided. The greater the proportion of capital goods over consumer
goods, the improvement in economic welfare will be lesser. Similarly the
production of luxuries is meant for rich classes only.
2. Higher GDP with greater environmental hazards such as air,
water and soil pollution will be little economic welfare.
3. The production of war goods will show the increase in national
output but not welfare.
4. An increase in per capita income may be due to employment of
women and children or forcing workers to work for long hours. But it will not
promote economic welfare.
Therefore the Physical Quality of Life Index (PQLI) is considered
a better indicator of economic welfare. It includes standard of living, life
expectancy at birth and literacy.
For achieving higher GDP, larger natural resources are being
depleted or damaged. This means reduction of potential for future growth.
Hence, it is suggested that while assessing national income, loss of natural
resources should be subtracted from national income.
When Indian national income is expressed in terms of US$ , the
former looks very low. If Purchasing Power Parity method is adopted
India looks better.
While producing economic goods, many environmental and social bads
are also generated. Hence, they also must be considered while enumerating