Why do national income accountants compare

Many aspects of market analysis and research likewise depend on this type of information. A reasonably reliable picture of the trend over, say, the past 10 or 15 years is essential in order to form an opinion as to how the economy is performing, in which direction and at what rate it is moving, and whether medium and long-term aims are being achieved.

This information is also an indispensable basis for sound projections into the future. Without reliable estimates of aggregate and per capita rates of growth of product, consumption, capital formation, etc. The question of long-term trend is also bound up with the development process per se. In all countries, economic growth is accompanied by or gives rise to structural changes and adjustments in the economy. But whereas in developed economies these changes and adjustments are largely incidental to the growth process and are not likely to be pronounced except over a considerable period of time, in developing countries they are fundamental to the growth process itself.

A developing economy is one in which not only the national product is increasing but one in which the industrial composition of the product and the economic structure itself are undergoing considerable change.

Indeed, the rate at which these changes are occurring is often in itself a measure of the rate at which development is proceeding. The basic structural change characteristic of a developing economy is usually a relative decline in agricultural net product, and a corresponding rise in manufacturing, construction, and services.

But beneath the surface, other and more profound changes occur. With the introduction of new crops and production techniques in agriculture, the composition of agricultural net output and input may change considerably, together with the absolute and relative level of farm income. This may be still more true of manufacturing, where new industries are being established and domestic production progressively increased.

At the same time, the process of development will generally be reflected in the emergence of a growing wage and salary earning class whose share in the national income may be expected to increase steadily. These and similar changes occurring over time need to be reflected adequately in any properly constructed set of national income accounts. For purposes of guiding policy, the most important set of information is that on short-term fluctuations.

Up-to-date knowledge of the rate of growth of aggregate product, and also of product in the major branches, is essential, for example, if the authorities are to decide on the type of fiscal or credit policy called for.

The same applies to information on income and demand. In the more developed countries, this information is frequently provided not only annually but quarterly. In most developing countries, however, quarterly information is ruled out by lack of data and resources, and the emphasis is necessarily on the measurement of the changes occurring from year to year. It cannot be too strongly emphasized that the provision of accurate information on annual change generally makes by far the heaviest demands on the national accounts and on those engaged in their compilation.

Given a minimum of basic data and a measure of resourcefulness and initiative, it is not unduly difficult to obtain a fair picture of the orders of magnitude of the main national aggregates in a particular year. Nor do the accounts have to be very sophisticated in order to provide a general picture of trend over the past 10 or 15 years. It is quite another thing, however, for those estimating the national income to be able to state with confidence whether the national product in a given year rose by 4, 6, or 8 per cent above the preceding year.

Experience indicates that, even in countries with sophisticated techniques of national accounting, the possible margin of error in this type of estimation is very great. Ostensibly minor adjustments to the estimating coefficients or to the price indices employed, for example, may often result in the emergence of a significantly different rate of real growth.

Irregular factors such as drought may also be operative, the effects of which need to be measured and taken into account in order to obtain a reliable picture of year-to-year change. With the wealth of basic and current statistics at their disposal, a problem frequently confronting national income accountants in developed countries is, first, to select the most relevant and reliable of the many data series available. Moreover, since these economies are not generally subject to marked structural change and fluctuation over the short and medium run, much of the statistical information may, from the viewpoint of the over-all reliability of the accounts, be of marginal importance only.

Paradoxically, therefore, it may be possible to construct tolerably accurate accounts, at least for a limited number of years, simply by extrapolating from bench-mark data on the basis of estimating coefficients and assumptions that change very little from year to year.

In developing countries, the problems and pitfalls of national accounting are magnified severalfold by the paucity of statistical information and the necessity to reflect in as much detail as possible the structural changes and adjustments indicative of the development process itself. Developing countries are by definition changing countries. To the extent that these changes are not reflected in the national accounts, the result is not only a loss of vital information but the emergence in many instances of a distorted picture of economic performance.

It is, therefore, precisely in developing countries that the employment of fixed estimating coefficients and assumptions, such as the percentage of value added in the various branches, is to be avoided except in marginal cases and for limited periods only.

Developing countries cannot use the shortcuts that are open to highly developed countries, which may need them less. Use of the short cuts must mean in practice that estimators are begging the question they should be answering: to what extent are the assumed relationships actually undergoing modification as a result of the development process? Among the factors contributing to the outdating of the standard economic coefficients and static relationships frequently employed for estimating are changes in technology and capital intensity, changes in production and input patterns, changes in the geographical distribution of population and capital formation, and so on.

An important influence may also be exerted by changes in relative prices. Value added in a particular branch of manufacturing, for example, is determined by, among other things, the relative prices received and paid per unit of output and input. To the extent that these prices move differently, the percentage of value added in the branch is also affected. The same applies to relative changes in wage, interest, and profit rates, which affect the distribution of the national income.

The importance of such price changes may be especially great in developing countries, where prices in general, and relative prices in particular, are frequently less stable than in developed countries. In most developing countries, the absence of information about expenditure on private consumption rules out the possibility of deriving an estimate of product from the expenditure side of the accounts.

Estimators must, therefore, rely all the more heavily upon the net product estimate obtained as the sum total of value added in each economic branch, i. It may be worthwhile, therefore, to review briefly the procedures commonly employed for obtaining these estimates. Except in a relatively small number of countries, the factor payments making up value added in each branch of the economy i.

Instead, value added is obtained, explicitly or implicitly, as a global figure calculated as a percentage of the estimated value of gross output in each branch. The principal exception is the government sector, where information on factor payments is generally available from the government accounts. The percentages used to derive value added are generally updated at infrequent intervals only, and in not a few countries remain unchanged for a decade or more.

The size and accuracy of the value-added estimates are likewise directly determined by that of gross output. The method thus rules out in advance the possibility of detecting or reflecting changes in the aggregate size and relative factor composition of value added by branch, caused by technological and relative price changes, irregular short-term fluctuations, etc.

Agriculture is particularly sensitive in this respect. With a given pattern of inputs, value added in agriculture will generally constitute a considerably higher proportion of the value of gross output in years of good harvest than in years of crop failure. In such circumstances, the use of fixed estimating coefficients may result in a seriously distorted picture of what is in fact happening.

Moreover, given the relatively high weight of agricultural production in total net product in developing countries and the fact that agricultural output in these countries is particularly subject to the vagaries of nature, the effect on the aggregate picture of growth may be very considerable.

It is also unhappily true that the estimates of gross output which form the basis for calculating the size and change in value added in the various branches are themselves often seriously deficient. Although there may be an occasional agricultural census, few developing countries carry out systematic annual surveys of agricultural production, whether on the basis of sample crop cutting and area estimates or representative farm units.

In some countries, the intercensus estimates are built up from partial data on marketing and a framework of assumptions about what the farmers themselves consume. In others, they are little more than guesses, informed or otherwise, based on presumed changes in crop areas and average yields. While these methods may perhaps provide rough estimates of the absolute level of production in particular years, the implicit picture of annual change can seldom be relied on. Manufacturing is hardly in better shape than farming, although owing to the smaller weight of manufacturing in total net product, the effect on the over-all growth rate for the economy is less pronounced.

With all too few exceptions, the annual estimates of gross output in manufacturing are obtained by extrapolating from bench-mark census or survey data relating to remote years, updated on the basis of current indices or other indicators of output in the branch. But here too, the most serious source of error undoubtedly lies in the current indicators employed. In a surprisingly large number of instances, the manufacturing indices employed for current extrapolation are compiled from returns sent in by a fixed sample of establishments selected in a comparatively remote base year.

This means that the index reflects the growth of output only in those establishments which were already operating at that time. On the other hand, there is a lack of information on new establishments commencing production. It is quite possible, however, especially in developing countries, for output in a particular branch of manufacturing to increase considerably through the opening of new establishments even if output in older-established enterprises remains unchanged.

Over a period of years, the cumulative downward bias resulting from this omission can be very considerable indeed. In the absence of systematic information, the estimates of construction are in almost all developing countries extremely crude.

Few countries maintain comprehensive and effective systems of building licensing which could provide reliable information on the level and trend of activity in the branch. At best, licensing is effective only in the larger towns and is restricted to the issue of building permits. Little if any follow-up is practiced, with the result that information on actual building starts and completions in a given period is generally unavailable.

In order to arrive at an estimate of building construction for the country as a whole, estimators are thus reduced to reliance on a flimsy framework of assumptions about the geographical distribution of construction, the time-lag between the date of issue of permits and actual implementation, etc.

The sole component for which direct information is available is generally public sector construction, which is derived from the government budgetary accounts. Here, too, the reliability of the estimate depends to a large extent on the system of government accounting employed and the possibility of adjusting from a cash payment to an implementation accrual basis.

Yet the aggregate estimate of the value of building and construction thus derived not only serves as the basis for computing value added in the branch but constitutes a major component of the estimate of gross capital formation. As a rule, the estimating procedures outlined for the three major branches of agriculture, manufacturing, and construction may be taken as typical of the other branch and sector estimates making up the national income accounts.

In most countries, indeed, the estimates for the trade and services branches are even cruder. Most frequently, they are obtained not through direct measurement at all but as a function of the level and movement of output in other branches, estimated in the manner already described. For the most part, the deficiencies outlined so far have been associated with the compilation of estimates at current prices.

But these provide a measure of nominal change only. For many purposes, the most important information provided by the national income accounts is the picture of real change derived from estimates at constant prices. Where detailed commodity and sector indices of prices are available, it may be a matter of comparative indifference whether the estimates at constant prices underlying the picture of real trend are compiled directly from quantitative data on production and expenditure, or by deflation of estimates derived in the first place at current prices.

However, where the requisite price indices are not available, as in most developing countries, it becomes especially important to compute the constant price series directly, as far as possible, from data on physical production or consumption. In practice, they are all too frequently derived by the deflation of current price series by inappropriate global indices, such as the general wholesale or cost of living indices.

Since the annual rates of growth in developing countries are often quite small, the distorting effect of this procedure on the picture of real trend may be very considerable. For example: an error of 2 per cent only in the estimated price rise in a particular year could mean that a calculated growth rate of 2 per cent should in fact read either zero or 4 per cent, depending on the direction of the error in the estimate of prices.

Given the objective difficulties in the way of obtaining accurate production statistics in most developing countries, it is vital that greater efforts be made to arrive at estimates of aggregate product also from the expenditure side of the accounts. Since the major gap in information on expenditure relates to private consumption, this would necessitate among other things the initiation and development of systematic surveys of household expenditures. In many, if not most, developing countries, the estimate of private consumption is obtained at the present time as a residual balancing item in the national accounts framework i.

Why do national income accountants compare the market value of Why do national income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production? What problem is posed by any What is the basic determinant of a the strength of the transactionsdemand for money the location of the transactions demand for moneycurve and b the amount of money demanded for assets, given aparticular asset demand for money curve?

How is Create an Account and Get the Solution. Log into your existing Transtutors account. Have an account already? Click here to Login. Accounting records of this nature include data regarding total revenues earned by domestic corporations , wages paid to foreign and domestic workers, and the amount spent on sales and income taxes by corporations and individuals residing in the country. Although national income accounting is not an exact science, it provides useful insight into how well an economy is functioning, and where monies are being generated and spent.

When combined with information regarding the associated population, data regarding per capita income and growth can be examined over a period of time. The GDP is widely used for economic analysis on the domestic level and represents the total market value of the goods and services produced within a specific nation over a selected period of time. The information collected through national income accounting can be used for a variety of purposes, such as assessing the current standard of living or the distribution of income within a population.

Additionally, national income accounting provides a method for comparing activities within different sectors in an economy, as well as changes within those sectors over time. A thorough analysis can assist in determining overall economic stability within a nation. For example, the U. During the financial crisis of , the GDP began to suffer as increased market volatility and shifting supply and demand affected consumer spending and employment levels.

As a result, President Barack Obama, after taking office in , instituted an economic stimulus package in response. As an example, the basic accounting identity for GDP, sometimes known as the national income identity, is computed using the following formula:. The quantitative information associated with national income accounting can be used to determine the effect of various economic policies. Considered an aggregate of the economic activity within a nation, national income accounting provides economists and statisticians with detailed information that can be used to track the health of an economy and to forecast future growth and development.

The data can provide guidance regarding inflation policy and can be especially useful in the transitioning economies of developing nations, as well as statistics regarding production levels as related to shifting labor forces. This data is also used by central banks to set and adjust monetary policy and affect the risk-free rate of interest that they set. Nevertheless, quantitative assessments of the economy and its growth bring discipline to the discussion.

Because government expenditures are neither voluntarily elicited nor priced in the market, they are valued at cost, which is primarily the cost of labor.

The capital cost of the buildings and land used is not included. Per capita GDP is frequently used as a measure of welfare, both for indicating the rate of improvement over time and for comparisons across nations. Yet per capita GDP is an imperfect indicator of welfare of the representative individual. GDP does not account for nonmarket production in the household—for example, meal preparation, cleaning, laundry, and child care.

Therefore, when these activities are, because of greater labor force participation, shifted to the market—as restaurant meals and semiprepared foods in grocery stores, cleaning and laundry services, and day care—the change in the value of production is overstated due to the decline in nonmarket household production.

Second, gray market and illegal activities—such as production and distribution of marijuana or gambling—can be significant sources of sustenance in economies but are not included. Third, in benign climates, clothing and heating are less costly, so comparing across countries or across regions within large states will distort the relative level of well-being.

Fourth, government services, because not subject to a market test, will typically be worth less than they cost, even though cost is used as a measure of value. A better measure is the median income level and, for many analytic purposes, the income level by quintiles of the income distribution; however, such distributional measures cannot be directly obtained from GDP data and population and require separate surveys. Another limit on per capita income as a measure of well-being is that it flies in the face of the way people think about having children.

Working for the U. Commerce Department in the s, Kuznets had developed time series of national income in order to develop a quantitative basis for studying and measuring economic growth and the shifts in production from agriculture to industry to services.

Interestingly, Kuznets parted with the department because it refused to include estimates of household production. GDP could be dramatically increased if housewives would simply contract out with their neighbors reciprocally to provide cleaning and cooking services. Kuznets also strenuously objected to counting all government spending on goods and services as part of GDP because he regarded most such expenditures to be intermediate, not final, products.