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Why is national income accounting important?

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Quick Answer

National income accounting is important because it is a government accounting system used to measure the level of economic activity. For example, it is used to measure the total amount of revenues earned by various companies in the country, the total wages paid and total tax revenues. It is mostly used to calculate the gross domestic product of a country.

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Full Answer

According to the Library of Economics and Liberty, national income accounting, when taken together with population data, can be used to measure the well-being of a country through per capita income as well as growth over time. Together with labor-force data, national income accounting can also be used to assess the growth and level of economic productivity. On the same note, it can also be used as a guide for providing an inflation policy, especially if used with monetary and financial data.

There are five main components of national income accounting. These include production, capital accounts, consumption, foreign transactions and government transactions. The production account deals with the business sector of the economy and comprises all firms of production, such as trading and manufacturing. Consumption accounts refer to the receipts and payments of the household sector, which consists of nonprofit organizations and consumers. However, the government account reflects the inflows and outflows of the government. Capital accounts show that there is an equilibrium between foreign and domestic investment, while foreign accounts show various transactions between a country and other countries of the world.

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