National Income

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In today’s class, we will be talking about national income. Enjoy the class!

National Income

As individuals and firms keep account of their economic activities such as their annual report which shows all their activities during the past year, countries too like individuals and firms do record and keep their economic activities.

National income is defined as the monetary value of the total volume of goods and services produced by a country in a year. It is the money value of the total income earned by all the factors of production in a given country over a period of time usually a year.  On the other hand, it is the total of the money value of all individual expenditure on goods and services at the market price.

The National Income is different from the income of the government which refers to the revenue the government raises through taxation and borrowing.

DEFINITION OF CONCEPTS

Gross Domestic Product (GDP):

This is defined as the total monetary value of all the goods and services produced in a country in a year by all the residents of the country regardless of whether they are citizens or foreigners. It relates to a closed economy, that is, it excludes the earnings or investment of citizens abroad but includes the earnings of foreigners or earnings from foreign investment in the country.

It can be measured at factor cost (adding together of production) or at the market prices.

In its calculation, no allowance is made for depreciation. So, it is best expressed as the addition of these three aggregates.

GDP = C + I + G

Where C = Consumption

I = Investment

G = Government expenditure

The GDP is used as an economic indicator in determining whether the country is growing, declining or stagnant.

EVALUATION

1. Define national income.
2. State the basic concepts of national income.

Gross National Product (GNP):

This is the monetary value of goods and services produced by the citizens of a country (including income from their investments both at home and abroad).

It is the total value of goods and services plus Net income from abroad which can be represented as ( x – m ) where x = export and m = import

That is to say, it includes the earnings of the citizens or their investment in other countries but excludes the earnings of foreigners or their investment in the country. In this case, no allowance is also made for depreciation.

Mathematically, it is expressed as GNP = GDP + Net Income from abroad; or

= GDP + x – m; or

= C + I + G + x – m

Net Domestic Product (NDP):

It is defined as the total monetary value of goods and services produced by all the residents of a country and earnings from their investment (whether citizens or foreigners) after allowance have been made for depreciation.

Mathematically, it is represented as:

NDP = GDP – Depreciation; or

= C + I + G – Depreciation

Net National Product (NNP):

This is the difference between GNP and estimated Depreciation or capital consumed during the year; this is the GNP less depreciation. This is the monetary value of goods and services produced by all the citizens of a country and income from their investments (whether at home or abroad) after allowance has been made for depreciation.

NNP = GNP – Depreciation; or

= C + I + G + (x – m) – Depreciation

Personal Income:

This is the earnings of an individual in monetary terms for taking part in the production of goods and services either by him or his property. It includes wages to labour for its` services, interest received by the capital owner, rent paid to the owner of the land, and profit received by an entrepreneur.

Disposable Income:

This is the income from all sources that accrue to household and private non- profit institutions after deducting personal income tax and other transfers to them. It is the income actually available for spending and saving.

It can therefore be summarized as Disposable Income = Personal Income – Personal Tax.

Per Capita Income (PCI):

It is the national Income head of the population. It is the National Income divided by the total population of a country. It is an economic indicator of a country’s level of standard of living. Whether the PCI of a country is high or low depends majorly on the available resources and the size of the population of the country.

However, an increase in GNP of a country does not mean an increase in PCI.

By formula, it is expressed as PCI = GNP / Total population

MEASUREMENT OF NATIONAL INCOME OF A COUNTRY

1. Income Approach: In this method, the total monetary values of income received by individuals, business organizations, government agencies within a year for their participation in production. The income received by factors of production in the form of wages or salaries, rent, interest and profits is added together. To avoid double-counting, transfer incomes or payments are not included. By using this approach, we arrive at either the G.N.P or G.D.P. at factor cost.
2. Output or Net product Approach: This is based on the census of production. It measures the value of all goods and services produced in a country during the year. To avoid double-country, income is measured on a value-added basis. (Value-added is the value of output, less cost of input). Natural income derived in this way gives the G.D.P at market prices. To get the G.D.P. at factor cost, we subtract taxes and add subsidies.
3. Expenditure Approach: This is the calculation of the total monetary value of expenditure on goods and services by government individual organization etc. within a country in a given period. In this calculation expenditure on intermediate goods and services bought and used for further production must be excluded. This is done to avoid double counting and therefore, the calculation should particularize only on expenditure on the monetary value of final goods and services.

EVALUATION

1. List three methods of calculating the national income.
2. Define the income method.

REASONS WHY A COUNTRY MEASURES HER NATIONAL INCOME

1. It indicates the standard of living of the country through the measure of per capita income.
2. It helps the country to determine the growth rate of the economy
3. The national income estimate is vital for economic policy and planning.
4. Measured through the output approach enables the country to know the performance of the various sectors of the economy.
5. The national income data gives an idea of the pattern of expenditure of households.
6. It influences foreign investments. Foreign investors usually seek countries with rich or fast-growing markets.
7. It forms the basis for contribution to international organizations.

EVALUATION

1. Write a short note on the expenditure method of computing national income
2. Give five reasons for measuring the national income of a country.

PROBLEMS ASSOCIATED WITH NATIONAL INCOME MEASUREMENT

1. They do not reveal the income distribution in a country. National income estimate does not indicate whether income is widely spread or concentrated in a few hands.
2. There is a difference in the internal value of money. The standard of living to a large extent depends on the value of money.
3. Double counting: At times it is problematic differentiating capital goods from consumer ones, they are therefore counted twice which give false national income.
4. Determining what income is: Determining what is income to a person, what constitutes economic activities the rewards for some services like that of full-time housewives subsistence farmers, self-employed etc. constituting problems to national income measurement.
5. The problems created by the self-employed. Many self-employed in our society do not keep proper book of account and therefore, it is very difficult to ascertain what their incomes, expenditures and outputs are.
6. Inflation and deflation: Inflation raises national income figure, while deflation reduces it. Problems here is how to arrive at accurate national income figure that is not affected by either inflation, or deflation
7. Determining Depreciation Value: The inability of many business units and individuals ventures to calculate the depreciation of their machinery makes it difficult to ascertain the true position of a country’s national income.
8. Insufficient Statistical data: It is extremely difficult to collect and assemble the required information for national income computation. In most cases, the information is just not available.
9. Ignorance and Illiteracy: These factors make a majority of the people in west Africa not willing to supply basis information that will be used for computation of national income
10. There are differences in the structure of production.

DEFINITION OF SOME CONCEPTS

1. Standard of living:

This is the level of welfare attain by individuals in a country at a particular time. This level of welfare is measured in terms of the quantity and quality of goods and services consumed within a period of time. The average standard of living in the country is partly determined by the income per head via the distribution of income.

2. Cost of living:

An individual cost of living refers to the total amount of money spent to obtain the goods and services which will enable him to exist at a particular time. The cost of living depends on the prices of goods and services which an individual consumes.

3. Price index:

The price index is a number are figures used to show the average rises and fall of price in percentage terms regarding a base period.

Index Number = Current year price X 100

.                               Base year price

EVALUATION

1. State five problems encountered in measuring the national income.
2. Distinguish between the standard of living and cost of living.

 

In our next class, we will be talking about Theory of Income Determination.  We hope you enjoyed the class.

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