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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

National Income Accounting

What it is:

National income accounting is a government accounting system to measure economic activity.

How it works (Example):

For example, national income accounting measures the revenues earned in the nation's companies, wages paid, or tax revenues. GDP is its ultimate and most widely used result.

In 2008, the United Nations Statistical Commission adopted an updated system of national accounts that is an international standard for compiling national statistics. According to the UN, "it consists of an integrated set of macroeconomic accounts, balance sheets, and tables based on internationally agreed concepts, definitions, classifications and accounting rules." The 2008 version is an update of the 1993, 1953 and 1968 versions of these rules.

There are two general approaches in national income accounting: the expenditure approach and the income approach. The expenditure approach adds up what has been bought during a period, and the income approach adds up what has been earned during a period. For example, the car industry can be measured either as the price paid for all cars that year or by the sum of the costs paid to produce those cars (labor, overhead, materials, interest expenses, etc.). The approaches can yield different results, though theoretically they should equal.

National income accounting is a mathematical system. It does not interpret, analyze or judge, and thus it is only one step in the analytical process of measuring a country's economic activity. In turn, it is generally not a good way to measure the welfare of a population or a country's "happiness."

National income accounting is also not all-inclusive. It does not measure, for example, activity in the black markets. It does not include the labor value of household work (child care, cleaning, laundry, etc.), and it reports government services at cost rather than at market value, which is often much lower.

Why it Matters:

National income accounting is not a set of accounting rules per se; rather it is a set of methods for collecting data. Its importance is not in process but in results: Through national income accounting, we have measures such as gross domestic product, unemployment figures, nonfarm payroll statistics and other important economic measures.

In turn, national income accounting is crucial to understanding whether a country is entering or exiting prosperous or challenging economic times. It also provides the quantitative information on which a government might base its fiscal and monetary policies. "You can't manage what you can't measure" might as well be its motto.