NATIONAL INCOME

Introduction

The total income received by the owners of the

factors of production in a given country over a given

period of time usually one year. It is the same as

National output or national product.

Terms used in national income

Gross Domestic product (GDP) and Net Domestic product

(NDP)

GDP refers to the total monetary value of all goods

and services produced in a country over a period of

one year.

Net Domestic Product is equal to gross domestic

product less depreciation.

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Gross National Product (GNP) and Net National Product

(NNP)

Gross National Product measures the total monetary

value of all goods and services produced by the

individuals of a given country irrespective of

whether they are producing it in their country or

outside the country.

GNP = GDP + Net factor income from aboard (export

less imports).

Net national product is the gross national product

less value of capital used in the production process

(depreciation)

NNP = GNP - Depreciation.

Per capital income.

The average income per head per year in a given

country.

Per capita income = National income/total population.

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The circular Flow of income.

The movement of income from households to the

firm and then back to the households is known as the

circular flow of income.

The flow money (income) round the economy is shown

by the dotted lines while the flow of goods and

factor services is shown by continuous (inside) line.

Assumptions made for the circular flow of income to hold.

 There are only two sectors in the economy that

is households and firms.

 Households spend all their income on goods and

services produced by the firms.

 Firms spend all their revenues on factors of

production provided by the household.

 There is no government intervention.

 The economy is closed, that is no foreign trade.

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The assumptions do not hold because of the following

 No country can exist without dealing with other

countries.

 It is difficult to have an economy where all

incomes are spent on only acquisition of goods

and services without savings and investments.

 It is not possible to have an economy where the

government does not take part

Injections

They are factors that increase income and

expenditure in the circular flow are referred to as

injections.

Withdrawals/leakages

The factors that reduce the volume of flow are

referred to as withdrawals/leakages.

Factors that affect the circular flow of income

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 a.) Savings

Savings by households reduce income received by

firms since they have been withdrawn from the

circular flow.

b.) Government

The government affects the circular flow by either

taxation which reduce the amount of income

available for spending or through government

expenditure.

c.) Investment

Firms borrow money that households have saved in

financial institutions such as banks and use it to

invest. The investments leads to higher income to

households since the capital goods are either hired

or bought from households.

d.) Foreign trade

Through exports a country is able to earn income

from other countries. The income earned from the

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foreigners is an addition to the circular flow of

income and hence an injection.

Equilibrium National Income

The national income equilibrium is achieved when

total injections are equal to total withdrawals

(leakages).

For national income to be in equilibrium the following

equation must

Savings + taxes + imports = investments + exports +

government expenditure.

Measurement of national income

National income may be measured using the following

methods.

1.) Expenditure approach

The national income is arrived at by adding together

the expenditure on all final goods and services in the

economy. The total expenditure is broken into the

following stages:

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 a.) Expenditure on consumer goods by the general

public (C).

b.) Expenditure on capital goods. Capital goods are

also called investments denoted by letter (l).

c.) Government expenditure which may be divided

into expenditure on goods and services from

firms and expenditure on factor services from

households.

Government is denoted by (G)

d.) Expenditure on net [Link] exports are

atotal exports less total [Link] denoted by

the expression ( X – M ). National income = C + I

+ G + ( X – M)

NOTE

Only expenditure on new goods is added in the

calculation while expenditure on second hand goods

is not added as no production has taken place.

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The national income arrived at using the expenditure

approach is at market price because it involves

expenditure on final goods and services thereby

including indirect taxes and subsidies in order to get

the national income at factor cost, subsidies are

added while indirect taxes are subtracted.

G.N.E at factor cost = C + I + G + (x – m) + (subsidies –

Indirect taxes)

To get net national expenditure/national income

capital consumption (depreciation) is subtracted

from Gross National Expenditure.

Thus: National income = Gross National Expenditure

– Depreciation

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Problems associated with the expenditure approach

i.) No accurate records of expenditure are kept

especially in the private sector.

ii.) Expenditures for the subsistence sectors are

only approximations due to lack of records in

the sector.

iii.) Differentiating between final expenditure

and intermediate expenditure may be

difficult.

iv.) Suffers from the problem of double counting.

v.) Fluctuating exchange rates may pose

challenges especially in valuation of exports

and imports.

2.) Income approach

Income approach takes into account the sum of

money that is received as income by different

individuals who contribute to the production of

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goods and services. The incomes include rent,

interest, wages and profit.

In addition public income and retained profits are

included, it should be noted that transfer payments

are excluded from the final calculations of national

income because they represent a redistribution of

incomes from those who have earned them to the

recipients.

Such income include, national insurance and social

security benefits to individuals, student‟ s grants

and pocket money.

National income may be calculated as:

G.N.I = personal income + retained profit – (transfer

payments + stock appreciation).

The national income arrived at using this method is

at factor cost because it represents the actual

payments to the factors of production. In order to

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get national income at market price,indirect taxes

are added and subsidies subtracted.

Gross National income is got by adding the net

income from abroad to gross Domestic product.

Thus .G.N.I = GDP + ( x – m )

To arrive at the net National income or simply

National income, capital consumption

(Depreciation) is subtracted from Gross National

income.

Thus, N.I = G.N.I – depreciation.

Problems associated with the income approach

i.) Problem of inaccurate data

ii.) Price fluctuations make it difficult

to calculate national income.

iii.) Problem of handling illegal and

unrecorded yield income to recipients.

iv.) Transfer payments pose a problem

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 v.) Income disclosures aren‟ t true because

people and firms like evading tax

3.) Output approach( value added )

The national income is arrived at by adding up the

values of all final goods and services produced by

firms during the year or it may be calculated by

adding up the values to the product at each stage of

production.

Government contribution to the national output is

also taken into an account. Such services include

education, health care and security. To find their

value we get what it cost the government to provide

them.

The GDP aimed at using this method is a factor cost

as it excludes subsidies and indirect taxes. To arrive

at the Gross National Product, Net Income from

abroad is added to the Gross Domestic Product

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Thus, GNP = GDP + (x-m)

To get the Net National Product/National Income

depreciation is subtracted from the gross National

product.

National Income = GNP – Depreciation

Problems with the output approach

I.) Problems of valuation due to

unavailability/inaccuracy of output figure

especially in the private section.

II.) Problem of deciding on the goods/services to

include eg. Whether the output of a house

wife should be included or not.

III.) The problem of valuing output in the

subsistence sector.

IV.) Problem of frequent changing process.

V.) Problem of valuing government output since

many of its services are not sold in the

market.

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 VI.) Problems of differentiating primary inputs

from intermediate inputs. VII.) Valuing illegal

activities like drug trafficking.

National Income statistics

National income statistics refers to all the data

collected or computed from various sources that

gives information about national income.

Uses of National Income Statistics

i. Use to measure rate of economic growth of

a country. When output figures are high it

means productivity has improved.

ii. Helps the government to plan its economy

since it provides useful information required

by planners.

iii. Used to compare the standards of living of

people in a country. By comparing the per

capita figures.

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 iv. Help the country to know the size and

contribution of various sectors to natural

income hence can take appropriate measures

to improve them.

v. Shows the progress of the economy over a

given period by comparing national income

statistics over given period.

Disadvantages of using National income to compare

standards of living in different countries.

a.) Different currencies

Conversation of currencies may be tedious.

b.) Different goods and services

The type of goods and services that are used to

compute national income may differ from country to

country.

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 c.) Disparity in distribution of income

Although income per capita may be similar in both

countries, standards of living may differ

considerably because of disparity in income

distribution.

d.) Different needs and tastes

National income statistics may not give a true and a

fair picture of standard of living due to different in

taste and needs of the people.

Factors that influence the level of national income

a.) Labour supply

A country with more labour produces more than a

country with less labour and also a country with more

skilled labour force would produce high quality goods

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and services than a country with less skilled labour

force.

b.) Capital

A country which uses modern equipment such as

tractors in ploughing, would be able to produce more

than a country using simple tools like jembes. This is

because capital varies from simple tools to modern

equipment‟ s.

c.) Entrepreneurship

Availability of Entrepreneurs who have the ability

to organize the factors of production in correct

proportions, make their output to increase thereby

increasing the national income.

d.) Availability of natural resources

The size of national income of a country depends on

the natural resources endowment of that country.

Therefore a country with abundant resources is

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likely to have a higher national income relative to a

country without.

e.) Level of technology

If advance technology and latest equipment used in

the process of production, then more goods can lie

produced, which increase the volume or size of

national income. f.) Political stability.

If there is political stability in the country, the

production can be sustained at the highest level and

the size of national income will be large. In case of

political condition is not good the production will be

adversely affected and so the size of national

income will be small.

g.) Attitude of citizens towards work.

A country whose labour force has negative attitude

towards work may register low level of national

income compared to another country where citizens

are hard working.

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