Need or Importance of National income Accounting
National income provides a comprehensive and detailed record of complex economic activities taking place within an economy and of the interaction between the different economics agents, and the groups of agents that take place on markets or elsewhere. The study of national income statistics is of vital importance for analyzing the actual performance of the economy and for preparing future policies. The growing importance of national income studies are as follows:
National income estimates are the important index of the economic structure of the economy. They tell us how income is earned and spent in the country. They provide knowledge about the relative importance of various sectors of the economy -and their contribution to national income.
2. Indicator of economic welfare and international comparison:
National income figures are the indicator of the people’s welfare of a country. With the help of these figures, we can have a comparative study of the standard of living of the people living in different countries as well as the people living in the same country at different times.
3. Helpful to formulate economic policy and planning:
National income throws light on the level of aggregate economic activity in the economy. Its estimates are important tools for economic planning and policies. On the basis of these estimates, the government makes future plans and policies for the development and growth of the country.
4. Inflationary and deflationary gaps:
National income estimates provide information about the existence of inflationary and deflationary gaps in the economy. They are also helpful in formulating anti-inflationary and anti-deflationary policies.
5. Basis of budgetary policies:
Modern governments prepare their budgets on the basis of national income data and make necessary changes in taxation and borrowing policies so as to avoid fluctuations in national income.
6. Importance in defense and development:
National income estimates enable us to determine the proper allocation of national products between defense and the development of the economy. It tells us how much of the national income can be spared for war purposes.
7. Provision of depreciation:
The study of national income shows how national income is divided into consumption expenditure and investment expenditure. It further guides us to make provisions for reasonable depreciation to maintain the capital stock of the country. Inadequate depreciation allowance means living at the expense of capital, while excessive depreciation allowance leads to an unnecessary reduction in consumption.
8. Importance in developing countries:
National income data are particularly important for developing countries like Nepal. They throw light on the importance and backwardness of various sectors of the economy and help in formulating appropriate economic policies.
9. Basis of social accounting:
National income figures form the basis of social accounting or national income accounting. Social accounts are the systematic records and presentation of national income data. The objective of social accounting is to signify the interrelations among various constituents of national income statistics.
10. Importance in economics analysis:
National income estimates help us in analyzing the functioning, growth, and anatomy of the economy. They are important in analyzing (a) the growth of the economy, (b) the trend of various sectors, (c) the trends of factor shares, and (d) the trend of various macro variables, such as aggregate consumption, aggregate investment, and aggregate saving, etc.