National Income Accounting

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It refers to continuous flow of goods and services and money income between firms and households in two-sector economy. It is circular in nature. It has neither any end nor any beginning point. Real flow shows the flow of produced goods and services and factor services between firms and households. Money flow shows the flow of consumption/ investment expenditure and factor payments between firms and households.

Basically, there are three methods of measuring national income as shown below:

1. Value Added Method (Product Method).
2. Income Method (Factor income distribution Method).
3. Expenditure Method.

Expenditure method measures final expenditure on 'Gross Domestic Product at market price (GDP_MP) during a period of account.
Final expenditure on GDP (GDP_MP) = Private final consumption expenditure + Government final consumption expenditure + Gross fixed capital formation + Change in stocks  + Net exports.
GDP_MP - Depreciation =  NDP_MP
National Income (NNP_FC) = NDP_MP + NFIA - Indirect Taxes.

This method is also called income distribution method because in this method we measure the factor incomes paid out (i.e., distributed) to the owners of factors of production by the various industrial sectors of the economy. Symbolically, We can following steps to reach out to national income.
Domestic income (NDP_FC)= Compensation of Employees + Operating Surplus + Mixed Income 
National Income (NNP_FC) = NDP_FC + NFIFA
Compensation of employees: (a) Wages & Salaries in cash (b) Wages & Salaries in kind (c) Employer's contribution towards social security schemes, such as pension, provident fund, gratuity etc.
Operating Surplus: It is the sum of Rent, Royalty, Interest and Profit. i.e. Operating Surplus = Rent + Interest + Royalty + Profit(Corporate Tax + Dividend + Undistributed Profit).
Mixed income: is the income earned by self-employed people like doctors, lawyers, chartered accountants, cobblers, barbers, shopkeepers, farmers etc. A part of their income is wage income and another part is property income. Thus it is called mixed income.

Value added method measures the value added (contribution) by each producing unit in the production process in the domestic territory of a country. It is the difference between total value of output and value of inputs bought from other firms. Symbolically,
Net value added at FC = Gross output - Intermediate Consumption - Depreciation - Net Indirect Taxes.