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The primary use of national income accounting is as a tool to set economic policy by measuring the economic activity of a country, including gross domestic product and unemployment figures. This type of accounting can be traced back to the 1930s. It was adopted by the British government and became the foundation for the United Nations System of National Accounts. Most countries, including the United States, now use this system.
National income accounting is a mathematical system of data collection based on either the expenditure approach, which adds up the cost of producing goods and services during a specific period, or the income approach, which totals what has been earned from goods and services. Data are usually reported annually. Not included in the data is the value from unreported income, such as household work and criminal enterprises.
National income accounting is restricted to data collection; it does not interpret the results, according to the Investing Answers website. It is merely one step in the analysis of economic activity that provides objective data that policymakers use to push for or against specific economic policies. Objectivity, accuracy and timeliness are essential in reporting the data. Delayed release of data can raise suspicions that a government is attempting to conceal information, according to international economic consultant Mack Ott.
Gross domestic product, the most widely used measure of the domestic economy, can be defined as the total market value of goods produced and services rendered during a set period. GDP includes only those goods and services produced by concerns located in the home country, whether the owners of those companies are domestic or foreign. GDP may not be completely accurate, because not all goods and services are actually placed on the market and market value may not be easily determined, but it is considered a fair representation of national output.
In addition to helping government formulate future economic policy, data collected by national income accounting can also serve many other purposes. For example, it can be used to assess the standard of living, income distribution, contributions of separate sectors to the economy and changes over time that indicate whether an economy is stable. In addition, the data can also be used to compare the economies of different countries.