National income measures the value of the final production of goods and services within the market boundary. The output, income and expenditure approaches to national income are alternative versions of the same value
measurement. The output approach establishes the total value of final production. GDP (gross domestic product) at market price equals the value of output in an economy in a particular year less intermediate consumption. The income approach equates the total output of a nation to the total income. It consists of wages and property income or the compensation of employees plus net interest plus rental and royalty income plus profits. The expenditure approach measures the total value of all goods as equal to the total amount of money spent on goods; GDP = C+I+G+(X-M).
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Where C = household consumption expenditures / personal consumption
expenditures, I = Gross domestic investment, G = government consumption less taxes and gross investment expenditures, X = gross exports of goods and services, M = gross imports of goods and services. Although both transfer pricing and the
unofficial nature of black market transactions can lead to an underestimation of national income.
Andre Vanoli (2005) discussed the measurement of value in the various systems of national accounts established since the Second World War. He considered that “market exchange is the touchstone of evaluation in monetary terms: goods or services against money” (p147). Statisticians have imputed values to owner occupied dwellings and agricultural own account consumption where no exchange takes place, but “Exchanges are fundamental, because they allow delineation of social monetary values”, as “It is only by referring to market values, or more generally to the value of actual monetary transactions, that it is possible to strive to assign a monetary value to non-market non-monetary flows” (p151). The existence of these imputed values does not mean that “an exchange or a payment is imputed” only that a “value” is. To impute an exchange to an imputed value “will only blur the scheme of analysis”. Actually to impute a value to an imputed exchange has the same effect.
It blurs the market boundary and implies that value can be created from thin air. Vanoli could not resolve what this “value” was that was being measured. He considered that the 1993 SNA clarified the issue by defining economic flows as having the effect of “creating, transforming, exchanging, transferring or
extinguishing economic value (1993, SNA 2.24)” (p151). This defined value as a form of value, it was not a definition but a tautology. This problem struck at the heart of marginal value theory predicted on a subjective value definition based on utility not exchange.
Alfred Marshall and Arthur Pigou both realised that while prices may – or may not - reflect marginal utility there was no monetary measurement of the average utility of products. The total of utility had no price or value, as every individual
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assessment of utility is subjective, personal and limited to the individual.
Consequently, the sum of these subjective assessments cannot be aggregated and measured as an objective total. If the sum of total utility cannot be measured objectively, then utility cannot be the basis of monetary measures which are an objective measure by definition. Need does not create value, production and exchange does. While Vanoli appreciates that value is predicated on market exchange, the neo-classical confusion of utility with exchange, of use value with exchange value, means that value as a measure of abstract labour time cannot be defined within the national accounts. Marx (1981) explained in Capital Volume III, published by Engels in 1894, that;
“The gross income is the portion of value and the part of the gross product measured by this, which remains over after deducting the portion of value, and the part of the total production measured by it, which the constant capital advanced and consumed in production replaces. Gross income, therefore, is equal to wages (or the part of the product destined to become the workers’ income again) + profit + rent. Net income, on the other hand, is the surplus- value, and hence the surplus-product that remains after wages are deducted, and so it expresses in fact the surplus-value that capital realises and has to share with the landowners, and the surplus-product measured by this” (p979).
According to Studenski (1958) “National income is an expression, in monetary terms of the current achievements of the national economy” (p163). It is strictly separated from non-economic production that “does not possess economic value” such production has a use value but not a market price, it is consumed but neither bought nor sold. The distinction between economic and non-economic
production is not defined by the usefulness of the output but by its social relationship to capital. This means that the output of subsistence farmers, who produce and
consume foods stuffs and domestically produced handicrafts, is not within the market boundary and the notional “value” of this output should not be measured in national income. Marginal theory that attributes exchange value to use value cannot explain the logical significance of the market boundary, which rests on the distinction between use and exchange value. A distinction that it claims does not exist.
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Studenski noted that if the output of subsistence farmers were to be included in measures of national income then according to this standard household production should be too and that;
“Logical consistency would demand reaching out even further to include similar free services rendered outside the family, e.g. neighbourly advice and co-operation versus paid professional services…But such a
supercomprehensive concept of national income, taking all these human actions into account, would embrace the entire content of human life and would, for all practical purposes, rob the national income concept of any meaning and render it useless as an expression of economic production” (p178).
When applied to the capitalist economies the logical application of neo- classical economics was illogical. How much more so for the non-market central plan? Paradoxically such a supercomrehensive concept of national income was developed by Studenski himself. He estimated the output of the Soviet Union and claimed the distinction between measures of planned and capitalist economies was “not very great” (p353). In practice national income statisticians ignore the logic of their illogical system and proceed perfectly logically so that the output of goods and services is evaluated first “at the market prices or costs of the goods and services sold” (p169).
Logically and in reality the output of centrally planned economies (CPE) was outside the market boundary and logically and in reality it produced no national income. The central plan produced physical output, use value not exchange value nor
value. The entire attempt to measure the output of a non-market economy by
imputing market values to it was illogical and unreal, a contradiction in terms.
To measure the growth of national income during the transition period it is necessary to separate market from non-market production. This is the actual amount of real commodity production, the proportion of total output inside the market
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boundary that is produced and sold. The transition to the market in the CEE and CIS led to the collapse of the plan. The output of use values slumped. This slump was real. However, this was not a fall in capitalist output. It was not a fall in market production, but a fall in centrally planned production. It was a collapse in use values not exchange values. It precipitated the creation of national income, which is
production within the market boundary, where previously there had been none. The growth of the market was synonymous with the collapse of the plan, while the total quantity of output of physical production slumped during the transition to capitalism, the value of production within the market boundary simultaneously increased.
National income rose even as output fell.