Introduction
 
This background paper examines the various methods of calculating national income and its components (excepting balance of payments statistics which are the subject of background paper 4). This document is arranged as follows: §2 provides a brief history of national income accounting, together with mention of some of the more important compilations of national income statistics produced by economic historians; §3 defines national income and introduces some important definitions; while §4 details, with numerical examples, the three approaches to the estimation of national income and §5 discusses the graphical presentation of national income and other time-series data.

A brief history of national income accounting

The first recognisable set of national income statistics were produced by Gregory King in the late seventeenth century. The modern phase of national income accounting, however, begins in the late nineteenth century, with much work being done in the interwar years by British academics like Bowley, Clark and Stamp, and the American, Simon Kuznets.

There were no official national income statistics in Britain before 1941, when they were compiled by the embryo CSO as part of war financial management. The key point about twentieth-century developments, relative to the earlier efforts of Gregory King, Colquhoun (late eighteenth-century), Baxter (mid-nineteenth century), and others, is that the emphasis was not just on national income, but on its relation to other economic flows, such as consumers’ expenditure, government revenue and expenditure, asset formation, savings and the balance of payments (Stone 1951, p. 83).

Since the 1940s much attention has been devoted by economists to refining contemporary national income statistics; and a great deal of research has been undertaken by economic historians on historical estimates of Britain’s national income. The landmarks here are Deane and Cole (1962) and Feinstein (1972); and more recently, Crafts (1985) who has reworked the Deane and Cole estimates for the so-called industrial revolution period.

National income: definition and basic concepts

Definition

National income can be defined as the income accruing to a nation by virtue of its productive activity. Whilst this is potentially ambiguous as there remains debate about what constitutes productive activity, further confusion abounds as there are many possible measures of national income. These tend to be used indiscriminately in certain quarters (e.g. by historians and journalists) without a proper appreciation of what is appropriate.

Basic concepts

The most important distinctions are between:

• gross and net measures, the latter being the gross measure adjusted for capital consumption (the depreciation in value of the capital stock over the measurement period). Since macroeconomics is concerned with explaining the overall scale of economic activity, the gross measure is thus the one most relevant; the net concept is of use in exercises such as measuring the standard of living when it is important to take account of the depreciation of assets.
• domestic and national measures, which accommodated the natural ambiguity about what constitutes the UK economy. There are two possible answers. One involves the domestic economy, which is all economic activity taking place in the geographical domain of the UK; the other involves the national economy, which is all economic activity of the residents of the UK wherever in the world that activity happens to be performed. The difference between these two aggregates is known as ‘net property income from (or paid) abroad’.
• market prices and factor costs. In modern economies governments typically tax expenditures on certain goods and subsidise others. This causes problems for the measurement of the value of any good or service. Thus the market price valuation records the prices paid by the final user (the consumer), whereas the factor cost valuation relates to the costs of all the factors of production, the income they actually receive, and is calculated by deducting taxes on expenditure and adding subsidies.
• nominal and real values. This is simply the distinction between national income measured in current pounds (nominal) or in constant pounds (real), so as to take account of changes in prices.

You will find in practice that for most macroeconomic history we use the GDP measure, either at current or constant prices. Nonetheless, you should be aware of the different concepts and when using national income data select the one most appropriate for your task.

There are two further conceptual problems that we need to consider.

1. What exactly do national income statistics measure? In essence, they measure aggregate marketed output. Thus much economic activity which does not yield an income (e.g. unpaid housework) is not recorded as national income.
2. The problem of the black economy, currently estimated at about 3% of GDP. A notional element for this is now included in national income statistics, and is related to the difference between GDP(E) and GDP(I) - see para. 4.1 below.

In both cases, great problems result if you try to use national income statistics from different economies to make assessments about their growth performance and income/wealth. As you can imagine, we have no reason to believe that the black economy is of the same size in each economy; nor that unmarketed output is a cross-country constant.

Measuring national income

To measure national income (or expenditure or output), it is necessary to estimate and then add together the appropriate flows that are taking place in an economy. There are three common methods of measuring national income, which produce three sets of estimates:

• expenditure GDP(E)
• factor incomes GDP(I)
• output GDP(O)

The first is the expenditure approach. Here national income (Y) is the product of the following identity:

 Y = C + I + G + EX - IM

 where:

 Y    = national income
 C    = consumers’ expenditure on goods and services
  I     = investment
 G    = government expenditure on goods and services
 EX  = exports
 IM   = imports

When these flows are combined, we have an estimate of national income at market prices. To convert this valuation to the factor cost measure needed for much macroeconomic analysis, it is necessary to deduct the expenditure taxes and add the subsidies to give national income (output or expenditure) at factor cost. Table BG.2A shows GDP(E) and its components at constant prices for 1873-1913 together with the derivation of GNP at current and factor cost and NNP.

Table BG.2A GNP and components at constant prices (£m), 1873-1913

    Value of
    physical
    increase     Net
    in stocks  Total   Property  Adjust-
    and  final   income  ment to   Capital
    work in  expendi-   from  factor   con-
 C G I progress X ture M GDP abroad GNP cost GDP GNP sumption NNP
1873 998 52 79 5 248 1,382 232 1,150 32 1,182 90 1,060 1,092 57 1,035
1874 1,032 56 94 20 251 1,453 236 1,217 36 1,253 93 1,124 1,160 57 1,103
1875 1,047 59 109 15 252 1,482 250 1,232 39 1,271 95 1,137 1,176 58 1,118
1876 1,058 61 122 10 251 1,502 256 1,246 39 1,285 96 1,150 1,189 59 1,130
1877 1,072 62 120 10 257 1,521 262 1,259 37 1,296 96 1,163 1,200 60 1,140
1878 1,084 65 114 5 261 1,529 264 1,265 40 1,305 96 1,169 1,209 61 1,148
1879 1,070 72 98 (5) 278 1,513 274 1,239 42 1,281 94 1,145 1,187 62 1,125
1880 1,126 71 99 30 306 1,632 295 1,337 42 1,379 96 1,241 1,283 64 1,219
1881 1,118 73 98 5 328 1,622 288 1,334 43 1,377 96 1,238 1,281 65 1,216
1882 1,138 76 99 10 334 1,657 303 1,354 46 1,400 96 1,258 1,304 65 1,239
1883 1,176 79 107 25 346 1,733 320 1,413 48 1,461 98 1,315 1,363 66 1,297
1884 1,180 81 103 - 344 1,708 309 1,399 53 1,452 98 1,301 1,354 67 1,287
1885 1,191 89 91 - 331 1,702 312 1,390 59 1,449 98 1,292 1,351 69 1,282
1886 1,198 88 83 5 340 1,714 315 1,399 66 1,465 98 1,301 1,367 68 1,299
1887 1,243 86 83 25 359 1,796 333 1,463 73 1,536 100 1,363 1,436 69 1,367
1888 1,260 86 88 15 381 1,830 344 1,486 75 1,561 100 1,386 1,461 71 1,390
1889 1,286 87 97 20 398 1,888 374 1,514 78 1,592 103 1,411 1,489 71 1,418
1890 1,310 89 99 10 397 1,905 374 1,531 84 1,615 105 1,426 1,510 72 1,438
1891 1,365 92 109 25 378 1,969 382 1,587 83 1,670 108 1,479 1,562 74 1,488
1892 1,359 92 114 5 375 1,945 388 1,557 88 1,645 109 1,448 1,536 74 1,462
1893 1,365 95 113 - 354 1,927 380 1,547 90 1,637 108 1,439 1,529 76 1,453
1894 1,420 99 120 30 372 2,041 411 1,630 94 1,724 111 1,519 1,613 77 1,536
1895 1,455 105 121 30 399 2,110 432 1,678 98 1,776 114 1,564 1,662 77 1,585
1896 1,515 110 137 35 416 2,213 456 1,757 100 1,857 117 1,640 1,740 79 1,661
1897 1,524 113 157 15 418 2,227 466 1,761 101 1,862 119 1,642 1,743 81 1,662
1898 1,588 116 181 40 419 2,344 482 1,862 104 1,966 122 1,740 1,844 83 1,761
1899 1,641 140 197 40 439 2,457 492 1,965 104 2,069 127 1,838 1,942 85 1,857
1900 1,637 182 199 - 421 2,439 505 1,934 98 2,032 128 1,806 1,904 88 1,816
1901 1,669 204 207 25 432 2,537 527 2,010 103 2,113 130 1,880 1,983 89 1,894
1902 1,678 193 217 10 450 2,548 530 2,018 108 2,126 130 1,888 1,996 94 1,902
1903 1,685 171 222 - 468 2,546 528 2,018 109 2,127 129 1,889 1,998 96 1,902
1904 1,709 165 210 5 476 2,565 534 2,031 109 2,140 129 1,902 2,011 97 1,914
1905 1,719 164 202 10 518 2,613 548 2,065 119 2,184 131 1,934 2,053 100 1,953
1906 1,749 162 194 20 552 2,677 566 2,111 125 2,236 132 1,979 2,104 102 2,002
1907 1,772 159 162 10 587 2,690 575 2,115 128 2,243 134 1,981 2,109 99 2,010
1908 1,766 163 142 (25) 544 2,590 549 2,041 139 2,180 132 1,909 2,048 106 1,942
1909 1,774 170 146 15 575 2,680 572 2,108 144 2,252 129 1,979 2,123 107 2,016
1910 1,803 176 148 25 618 2,770 589 2,181 147 2,328 131 2,050 2,197 108 2,089
1911 1,857 181 141 25 634 2,838 606 2,232 157 2,389 135 2,097 2,254 109 2,145
1912 1,869 184 138 15 669 2,875 650 2,225 163 2,388 136 2,089 2,252 111 2,141
1913 1,937 188 157 40 691 3,013 672 2,341 173 2,514 140 2,201 2,374 114 2,260
SOURCE: Feinstein (1972, table 5).

The following identities underlie table BG.2A:

•  Total final expenditure = col. (1)+(2)+(3)+(4)+(5)
•  GDP = Total final expenditure - col. (7)
•  GNP = GDP + col. (9)
•  NNP = GNP - col. (14)

The second method of measuring national income is to measure factor incomes directly. These include:

•  income from employment
•  income from self-employment
•  gross trading profits of companies (private and public sector)
•  rent
•  property income from abroad

The expenditure (adjusted to a factor cost basis) and factor income measures of national income should yield identical results. In practice they don’t because of unrecorded incomes (the black economy), though the margins of error in Britain are typically not serious (in contemporary Italy the difference can be as much as 15%).

The third method of measuring national income is the output approach, which measures the value of output of the three sectors of the economy (primary, secondary, tertiary) to arrive at an estimate of aggregate output. Thus for the interwar period, the categories included are:

•  agriculture, forestry and fishing
•  mining and quarrying
•  manufacturing
•  building and contracting
•  gas, electricity and water
•  transport
•  communications
•  distributive trades
•  insurance, banking and finance
•  ownership of dwellings
•  public administration and defence
•  other services

Finally, what reliability can we assume about Feinstein’s historical estimates of Britain’s national income. His overall reliability grades are given in table BG.2B, while table BG.2C applies these grades to the main series.

 Table BG.2B National income data reliability grades

A Firm figures +/- less than 5%
B Good estimates +/- 5% to 15%
C Rough estimates +/- 15% to 25%
D Conjectures +/- more than 25%
 SOURCE: Feinstein (1972, p. 21).
 

 Table BG.2C Summary of reliability grades for main series, 1855-1965

 1948-65 1924-38 1890-1913 1870-89 pre-1870
Income from employment A A B C C
Income from self-employment B B C C D
Gross trading profits of companies B B B C D
Gross trading surplus of public A A - - -
corporations
Gross trading surplus of other public B B - - -
enterprises
Rent B B B B B
Net property income from abroad C B B C C
Consumers’ expenditure A A B C -
Public authorities’ current A A B B -
expenditure
Gross domestic fixed capital B B B/C C C
formation
Stocks and work in progress:
physical increase C D D D D
stock appreciation C D - - -
Exports of goods and services A B B B C
Imports of goods and services A B B B C
Taxes on expenditure A A A B -
Subsidies A B - - -
SOURCE: Feinstein (1972, table 1.9).
 

National income data: graphical representations

Figure BG.2A charts the GDP series of table BG.2A, the classic late-Victorian and Edwardian era, together with the linear trend line for this series which has a slope equivalent to an annual average growth rate of 1.8%. This is a compound growth rate, the geometric mean (see Floud 1979, p. 77), which was here calculated using the pre-prepared EXCEL worksheet, ESHCALC1.xls.

[insert graph gb2a]

[insert graph bg2b]
 

Such a graph, together with the geometric mean growth rate, are typical forms of presentation which well-capture the extent of economic growth. Figure BG.2B charts GDP per capita for the same period. Once population growth has been taken into account, GDP growth becomes much less dramatic at an annual average of 0.84% compound, rising from £35.74 per capita in 1873 to £51.28 in 1913.

[insert graph bg2c]

[insert graph bg2d]

 
However, these differences would not come out from a direct visual comparison of the two graphs. Indeed, their slopes look almost identical. The problem here is that we are comparing two series with very different initial magnitudes and subsequent absolute growth: 1873 values of £1,150m for real GDP and £35.74 for real GDP per capita and respective growth of £1.191bn and £15.54. This problem is best overcome in one or both of two ways: using semi-log charts or index numbers. Figure BG.2C shows the former and figure BG.2D the latter. In the semi-log format vertical distance on the Y axis represents exactly the same proportionate rise, i.e. the rise from 10 to 20 is represented as the same distance as the rise from 1,000 to 2,000, and it is possible to accommodate two series which are denominated differently. However, because in absolute terms the two magnitudes are so different, there is little detail in figure BG.2C. Accordingly, figure BG.2D is rather better and index numbers are to be preferred here.

Conclusions

In our introduction to national income statistics we noted that there are a number of problems associated with their compilation and interpretation. We ought also to note that these are compounded when we attempt cross-country comparisons with such data. The principal problems here concern the exchange rates chosen for each country and the different coverage of the data between countries (see Johnson 1988).

We must remember that national income data is a summary measure, and thus doesn’t tell us anything about one of the important questions that interest economic and social historians: how are the gains from growth distributed. It is all very well to show that real GDP or real GDP/per capita was growing at a healthy 2-3% per annum on average in a particular country; it tells us very little about welfare. For that we need data on income and wealth distribution.
 

 
 
 
 
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(c)R. Middleton 1997. Last modified 30 June 1998.