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Chapter: 12th Economics : Chapter 2 : National Income

National Income and Social Accounting

National income is also being measured by the social accounting method.

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.


1.  Social Accounting and Sector

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

1.        Firms,

2.        Households,

3.        Government,

4.        Rest of the world and

5.        Capital sector.

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 firms.

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.


2.  National Income and Welfare

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.


3.  National Income & Erosion of national Wealth


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.


4. National income in terms of US$

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.


5.  Social and Environmental Cost

While producing economic goods, many environmental and social bads are also generated. Hence, they also must be considered while enumerating National income.

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