NATIONAL INCOME

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.

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