NATIONAL INCOME
National Income is an uncertain term
sometimes interchanged with National Dividends or National Output. National
income (NI) has been defined in various ways, some of which are below.
The
Marshallian Definition; This definition was given by Alfred Marshall in his
book Principles of Economics (1890), he defined National income as the labour
and capital of a country acting on its natural resources producing annually a
certain net aggregate of commodities, materials, immaterial including services
of all kinds. This is the true net annual income or revenue of the country.
Here ‘net` refers to deduction from
the national income in respects to depreciation and addition of income from
abroad.
Defects:
·
Production
of numerous goods and services creating difficulty in correct estimations
leading to incorrect or improper estimated national income.
·
The
major problem of double counting, hence national income is not absolutely
correct.
·
Goods
produced are not properly market or accounted for, documents like goods for
self-consumptions, exchange or gifts are not properly market causing a problem
in calculating national income. This is more prevalent in agricultural based
economy
The
Pigovian Definition; National
income as defined by A.C. Pigou is that part of objective income of the
community, including income from abroad which can be measured in monetary
terms. This definition was considered better than the Mashallian definition and
proved to be more particular also as two criteria’s were laid down for the
estimation of national income, and they were
o
Avoidance
of double entry, only goods and services measurable in monetary terms are
entered.
o
Incomes
received from investments abroad are included.
Defects:
§ Inability to
differentiate between commodities measurable in monetary terms from others.
§ Only commodities
exchangeable for money are calculated, the national income is not considered
corrects as some commodities especially services cannot be measured in monetary
terms and as such are neglected
§ Works better in
developed countries where goods are readily exchanged for money, but not in
developing countries where major portions of production are bared
Fisher’s Definition; Irving Fisher adopted
‘consumption’ as the criterion of
national income whereas Marshall and Pigou regarded it as production. He
defined national income as the national dividends consisting solely of services
as received by the ultimate consumers, whether they are from material or human
environment. Properties owned during the year are not part of that years income
but an addition to capital, only services rendered during the year are income. His definition is considered better than
that of his predecessors because it provides adequate concept of economic
welfare dependent on consumption and consumption represents standard of living.
Defects:
·
Difficulty
in estimating monetary value of net consumption than net production.
·
Certain
goods are durable and long lasting but only services rendered to us during a
year is included in the national income
·
Durable
goods change hands severally leading to a change in ownership and value, making
it difficult to measure in monetary terms the service value of those goods from
the point of view of consumption.
Other definitions of national income
includes that of Simon Kuznets where he defined national income as the net
output of commodities and services flowing during the year from the country’s
productive system in the hands of ultimate consumers.
Another definition by the United
Nations defined national income on the basis of systems of estimation, it was
defined as net national product as addition to the shares of different factors
and as net national expenditure in a country in a years’ time.
Generally national income can be
defined as the measure of monetary value of all goods and services produced by
all factors of production within a country during a given period usually one
year.
Any of the above definitions may be
adopted in practice while estimating national income as they will all give the
same result if different items were correctly included in the estimate.
National income is usually denoted
as NI = NNP – indirect taxes
CONCEPTS
OF NATIONAL INCOME
Gross
Domestic Product (GDP)
This refers to all final goods
and services produced within a year in a country. It was usually denoted as GDP
= C + I + G, when it had three essential components (household consumption,
private investments, government expenditure). In modern times the GDP has a fourth
known as net income from abroad denoted by (X – M). with is four component the
GDP assumes a better status known as the gross national product (GNP)
Gross
National Product (GNP)
This is the total measure of the
flow of goods and services at market value resulting from current production
during a year in a country including its net income from abroad. It includes
four types of final goods and services:
§ Consumer goods
and services
§ Gross private
domestic investments in capital goods including unfinished goods, residual
constructions etc.
§ Government produced goods and services.
§ Net exports of
goods and services or net income from abroad.
Factors
Affecting GNP
- Ø As everything is measured in monetary terms, the GNP shows a rise or fall which may not be true, but follows the rise or fall in prices.
- Ø To avoid double counting only final goods and services should be calculated at market prices and not intermediate goods to avoid overestimating the GNP.
- Ø Gifts and goods rendered for free should not be included as their market value cannot be correctly determined.
- Ø Transactions that do not pertain to production with the certain year are not included, but depreciation should be deducted from the GNP.
- Ø Income from illegal activities are included as their year of production cannot be ascertained and also because most are foreign.
Approaches
to Calculating GNP
There are three approaches used in the
estimation of GNP. The results from all three should be the same following
appropriate adjustments.
Income Approach; This deal with remunerations in
monetary terms to the factors of production annually in a
country. GNP= wages and salaries + rents +
interest+ dividends + undistributed profit + mixed income +
direct tax + indirect taxes
+ depreciation + net income from abroad.
Expenditure Approach; Here GNP is the
total of expenditures incurred on goods and services during one year in a country. GNP = private consumption (C) +
gross domestic private investments (I) + net foreign investment (X –
M) + government
expenditure on goods and services (G) NI
= C + I + (X – M) + G
Value Added Approach; Using this
method only the monetary value of goods and services produced at current
prices during the year is are taken into account.
Net National Product (NNP)
While the GNP
includes the value of total output of consumption goods and investment goods,
it also includes some sort of fixed capital which incurs depreciation or
capital consumption allowance. Therefore the NNP is obtained by deducting
depreciation from the GNP NNP = GNP – Depreciation
Domestic Income or Product (DI)
This is the
income earned or generated by all factors of production within the country from
its own resources. It includes wages and salaries, direct taxes, interest,
dividends etc. It
is seen the domestic income does not include net income from abroad, it can be
easily gotten by deducting net income from abroad from the national income. DI = NI – (X – M)
Private
Income (PI)
This is the
income obtained by private individuals from any source, productive or otherwise
and also the retained income of corporations from national income after certain
additions and subtractions. These include insurance pensions etc. PI
= NI + transfer payments + interest on public debt – social security – profits surplus of public
undertaken
Personal
Income (PI)
This is the total income received
by individuals from all sources before direct taxes in a year. It can be
derived from NI after certain deductions. Personal
income is different from private income because it excludes undistributed
profits and as such is lower than private income. PI = personal income – undistributed profits –
profit taxes.
Disposable
Income (DI)
This is the actual income which
can be spent on consumption by individuals and families. Disposable income can
be obtained from personal income by deducting direct taxes. The whole
of a person’s disposable income is not spent on consumption alone so disposable
income is divided into; consumption expenditure and savings.
DI
= personal income – direct taxes.
Real
Income (RI)
This is the income (national,
personal or disposable) in terms of current prevailing market prices. This is
the expression of the value of money in the amount of goods and services which
it can purchase at a particular time. Real income is simply the purchasing
power of a particular income.
Per
Capital Income
This is the average of the people
of a country in a particular year. It measures income at current prices and at
constant prices. Per capital income is national income divided by population. It helps us
know the standard of living of the people, but it is not very realistic due to
the unequal distribution of NI, as the rich get greater portion, there for the
income of the common man is lower than the per capital income. Per
Capital Income = NI ÷ population.
METHODS
OF MEASURING NATIONAL INCOME
There are four methods of measuring
national income. The availability of required data in a country and the purpose
for national income estimation determine which method will be adopted.
Product
Method;
Following this method, the total
value of final goods and services produced in a country during a year is
calculated at market price. To
get the GNP, all productive activities (mining, agriculture etc.) are
calculated at market prices. Intermediate goods are excluded only the final
goods are included.
Income
Method;
According to this method, all
income, that is net incomes accrued to all factors of production (net profit,
net wages, net rents etc.) are added but income in form of transfer payments
are excluded Income
data can be obtained from various sources like the income tax payments for the
high income earners and wages bills for the average income earners.
Expenditure
Method;
Here total expenditure incurred
by the society or nation in a particular year are calculated together including
net domestic investments, government expenditure on goods and services, net foreign investment etc. This
method is based on the concept or assumption that NI equals national
expenditure.
Value
Added Method;
This method of measuring NI, is
measured by the value added by industries, that is the difference between
material input and output at every stage of production. This
method is the addition of all such differences from all industries in the
nation’s economy which gives the gross domestic product (GDP)
DIFFICULTIES
IN NATIONAL INCOME ESTIMATION
Many difficulties have been observed
over the years in the proper estimation on any country’s national income, they
include;
·
Difficulty in clearly defining the nation as NI includes
net income from abroad earned by national of government investments in foreign
countries beyond the boundaries of the said country
·
NI
is measured in monetary terms but some goods and services, especially services
cannot be properly assed in monetary terms, whose exclusion reduces the NI.
·
A
major difficulty in the estimation of NI is the incidence of double counting
which arises from difficulty in distinguishing between intermediate and final
goods and services.
·
Incomes
earned from smuggling, gambling and other illegal activities are excluded but
they still have monetary value, actual NI reduces from their exclusion.
·
Another
difficulty is the inclusion of transfer payments which are considered earnings
from the view of individuals and expenditure from the view of government.
·
Ever-changing
price levels is another major difficulty in Ni estimation, as money (price
level) is the measuring rod for NI. Even if production falls NI shows an
increase as far as price level rise.
·
The
estimation of Ni in monetary terms is underestimating the real Ni as it does
not include leisure foregone in the production process. Ni does not take into
account the opportunity forgone which is considered as the actual cost of production
in economics.
·
In
estimating NI some services are not adequately estimates. For example the
monetary value of the Police or the Military cannot be adequately estimated in
times of relative peace.
IMPORTANCE OF
NATIONAL INCOME
·
NI
data is essential in the economic planning of a nation
·
NI
data is important for the determination of a country’s per capital income which
reflects on the economic welfare of the country’s population.
·
NI
data gives knowledge and statistics useful in the distribution of income in a
country.
·
NI
data forms the basis for national policies such as employment, investment. With
NI data proper measures can be taken to re-position a nation’s economy
favorably.
·
NI
data is used for research by economic scholars; they use information from social
accounts which are parts of NI.