• UGI USER
  • Oct 06, 2023
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Q. What is the significance of National Income Accounting? Discuss the various factors affecting GDP of a country.

 

Approach

● Start with a brief introduction about National Income Accounting.

● Mention its significance.

● Discuss various factors affecting the GDP of a country.

● Conclude accordingly.

Answer 

  • National Income Accounting (NIA) refers to methods or techniques used to measure the economic activity in a national economy as a whole.
  • National income of a nation can be calculated in terms of GDP, GNP, NDP and NNP. However, the Gross Domestic Product (GDP) is the most acceptable indicator worldwide.
  • GDP refers to the total market value of all the final goods and services produced in an economy in a given period of time. In India, GDP is estimated by the Central Statistical Office (CSO).
  • Three methods used in its calculation are Value Added Method (or the Product Method), Income Method and Expenditure Method.

Significance of national accounting

  • International comparison: National Income Accounting measures growth rate and development of nations, which can be used to compare the standard of living of different countries.
  • Business decisions: It reflects the relative contribution and potential of various sectors of the economy, which guide the business class to plan for future production.
  • Policy formulation: It throws light on the distribution of income and resources in the economy, which helps the government in proper allocation of resources to bring in equality and ensure development of the nation.
  • Policy evaluation: Income accounting identifies specific economic achievements and failures, which help the people of the nation in evaluating the policies of the government.
  • Annual budget: It shapes the budgetary policy of the government, including borrowing and tax policy in order to neutralize the fluctuations of income and employment. The government adopts a deficit or surplus budget to arrest depression or inflation in an economy.

The factors affecting GDP of a country include

  • Natural resources: The geographical location and availability of natural resources like coal, iron and timber etc. affects the level of GDP.
  • Capital: Capital is generally determined by investment that, in turn, depends on other factors like profitability, political stability etc.
  • Labour and entrepreneurship: The quality or productivity of human resources is more important than their number. Manpower planning and education affect the productivity and production capacity of an economy.
  • Technology: This factor is relatively more important for nations with lesser natural resources. The development in technology is determined by the level of invention and innovation in production.
  • Government: Through its policy intervention, the government can provide a favorable business environment for investment in addition to maintaining law and order.
  • Political stability: A stable economy and political system helps in appropriate allocation of resources. Wars, strikes and social unrest will discourage investment and business activities.

The GDP as a parameter to judge economic growth is criticized on the fact that parameters like gender inequality, income inequality, conditions of the poor are not reflected in it. Other indices like the Human Development Index (HDI), Gender Inequality Index (GII) etc. are used to take these parameters into account.