Question

Discuss the importance of social accounting in economic analysis.

Answer 1

National Income and Social Accounting:

1. National income is also being measured by the social accounting method.
2. Under this method, the transactions among various sectors such as firms, households, government, etc., are recorded and their interrelationships traced.
3. The social accounting framework is useful for economists as well as policy makers because it represents the major economic flows and statistical relationships among various sectors of the economic system.
4. It becomes possible to forecast the trends of the economy more accurately.

Social Accounting and Sector:

1. Under this method, the economy is divided into several sectors.
2. A sector is a group of individuals or institutions having common interrelated economic transactions.
3. The economy is divided into the following sectors:
   1. Firms
   2. Households
   3. Government
   4. Rest of the world and
   5. Capital sector.
4. “Firms” undertake productive activities. Thus, they are all organizations that employ the factors of production to produce goods and services.
5. “Households” are consuming entities and represent the factors of production, who receive payment for services rendered by them to firms. Households consume the goods and services that are produced by the firms.
6. “The Government sector” refers to the economic transactions of public bodies at all levels, center, state, and local.
7. The main function of the government is to provide social goods like defense, public health, education, etc.
8. “Rest of the world sector” relates to international economic transactions of the country. It contains income, export and import transactions, external loan transactions, and allied overseas investment income and payments.
9. “Capital sector” refers to saving and investment activities. It includes the transactions of banks, insurance corporations, financial houses, and other agencies of the money market.