NATIONAL INCOME ACCOUNTING
WHAT IS NATIONAL INCOME ACCOUNTING?
National Income Accounting shows the main aggregate relating to National income and its component. The standard of the economic life of a country can be successfully measured through the National Income Accounting. Just as an individual enterpreneur keeps on account of its economic activities, it is the same way that various countries of the world calculate the total production of goods and services in a year, and this calculation give directions to economic progress of such countries.National Income Accounting can also be defined as the total income in form of wages, interest, profit and rent accuring to a nation from productive activities in a year.
WHAT IS NATIONAL INCOME ?
National Income may be defined as the monetary value of goods and services produced in a country in a given time period usually a year, account having been taking of the deductions to be made due to depreciation of the capital stock news in the production of these goods and services.
DEFINITION OF CONCEPTS
- Personal Income (PI): It is the earnings of an individual (in monetary terms) for taking part in the production of goods or for services either by him or his property. It includes wages to labour for its services, interest received by capital owners, rent paid to the owner of the land, and property received by an entrepreneur.PI = NI - Undistributed corporate tax - Profit tax - Social Security Scheme + Transfer Payments.
- Disposable Income (DI): This is part of income which is left after personal income taxes deducted; that is personal income less taxation. It is the amount left for spending and saving.
Where; DI = Disposable Income
Y = Income
- Gross Domestic Product (GDP): This is the total value (in monetary terms) of all final goods and services produced in a country within a period of one year, by all the residents of the country regardless of whether they are citizens of foreigners. It emphasizes the geographical aspect of production; that is, value of output within a country. It therefore excludes the earnings of citizens or their investment abroad, but includes the earnings of foreigners or earnings from foreign investment in the country. In calculating GDP, no allowance is made for depreciation. GDP is the same as Gross Domestic Income. This is because the income received for producing goods and services must be equal to the value of goods and services (the products).GDP = NDP + DepreciationORGDP = GNP - Net income from abroad.
- Gross National Product (GNP): This is the total monetary value of goods and services are 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. That is, it includes the earnings of the citizen or their investment in other countries but excludes the earnings of foreigners or their investment in the country. In this case also, no allowance is made for depreciation.
- GNP = GDP - Net income from abroad5. Net domestic product (NDP): This is the GDP less depreciation. In this case, allowances are made for the 'wear and tear' of capital (i.e. capital consumption). It can therefore be defined asthe total monetary value of all final goods and services produced by all the resident of a country and earnings fromtheir investments (whether citizens of foreigners), after allowances are being made for depreciation.NDP = GDP - Depreciation
- Net National Product (NNP): This is the Gross National Product less depreciation. It is therefore the total monetary value of all final goods and services produced by all the citizens of a country and income from their investment (whether at home or abroad) after allowance has been made for depreciation.NNP = GNP - Depreciation
- National Income (NI): It is the estimated monetary value of all goods and services produced in the country during a specific period of time, usually a year. This is equal to total income accuring to all the four factors of production in a country. It is the sum total of all profits, interest, wages and rent received within a year or the sum total of all personal income.8.
- Income per Capita: This is the income per head of the population. It is the National Income divided by the total population of a country.Per Capita Income = NI/ Population.
- Real Income: Real Income may be defined as money in terms of goods and services it will buy. Real income is national income expressed in terms of general level of prices. In order to find real income, a base year is chosen when the general price level is neither too high nor too low then the price level of that year is assumed to be 100. Real income can be calculated as thus:RNN = Money NNP × 100/ Price index for that year.
- Transfer Earnings: This is the amount that will be sufficient to retain labour on a particular job rather than transfer to another one. It is known as opportunity cost or economic rent. It is the amount factors of production could expect to earn in its best alternative use..
- Transfer Payments: This are payments which are not a return for current services. Such are not included in the National Income estimates because they merely transfer spending power from one lot of people to another. It includes money to pensioners, disabled and unemployed. They are money received but not worked for
There are three major approaches to estimating National Income namely:
- Output Method: this is the total monetary value of goods and services produced in a country in the year. It includes the market value of product produced in agricultture, Forestry, Fishery, Manufacturing, Banking, Insurance, Communication, Teaching and Services. This is the method of calculating income using the information on the net output of various sectors of the economy. To prevent double counting value-added basis is used. Value-added means difference between the value of material output and imputs at each stage of production.
- Income Method: This is the sum total of income earned by all factors of production used in the production of goods and services in a year. It is the sum total of the following items: wages, rent, interest and profit. Moreover, income from transfer payment is not included.
- Expenditure Method: This is the sum total of expenditure incurred on goods and services during one year in a country. This measures National Income by adding the expenses of the various sectors of the economy namely: consumption by households, investment s by firm and government spending. Expenditure on transfer payment is not added. Only expenses on final output should be included to avoid double counting. Expenditure approach can be symbolically stated thus;
Y = C + I + G + (X - M)
Y = C + I + G + Xn
Y = The value of National Income
C = Aggregate investment expenditure (Consumption)
I = Private investment expenditure
G = Government expenditure
X = Export expenditure
M = Import expenditure
Xn = Net exports (Xn>0)
USES OF NATIONAL INCOME
- Generation of a Nation's Wealth: National Income shows changes in the way in which the economy generates its wealth
- .Estimation of Assets and Liabilities: National Income statistics provide us with the opportunity to estimate the assets and liabilities of a country.
- Foreign investment: Foreign investment are attracted to a country based on the level of its national income.Index for comparison:
- National Income is used for sectorial comparison between Nations. In fact they are used to compare the progress or retrogression of nations as well as the standard of living of different countries.
- Political and Economic Considerations : Contributions to international organisations such as International Monetary Fund (IMF), The World Bank, The United Nations, etc, are usually based on the country's economic strength obtained from National statistics.
- Helps to measure growth rate: It shows the growth rate of the economy.
- Increase in output is a sign of economic growth.Standard of living: The size of the National income determines the well-being of the people.
- It shows the overall living standard of the people. The larger the size the more the welfare of the peopleFor measuring performance of the economy:
- Help to assess the performance of the economy as a whole. The estimate provide information on the economic progress of a country.
- Research Purpose: Data provided by National Income estimates are used for research purpose. Professionals, Scholars and Economists make use of the data to carry out research.
- Guide to determining aids for assistance: Developed nations and international institutions determine what to give as aids and assistance on the basis of National Income.
- Economic planning and development through national income statistics relevant information are provided in which future planning maybe you based this is because successful planning requires fairly accurate figures upon which group decision can be based thus this enables assessment to be made of the development plans and progress in the country.
- Determine size and growth of Nation's income .National income statistics are used to calculate the rate at which a Nation's income is growing, through these we are able to know whether the Nation's income is growing at a required level or that there are insufficient investment to maintain reasonable living standard in the future also we are able to know how better a Nation's income level is when compared with others.
- Comparison of living standard: the comparison of living standard could be achieved on the basis of average income per head that is to say per capita incomeDetermine nation's living standard. Through national income we are able to know the overall standard of living of the people because national income is the flow of wealth and wealth is the ideal indication of well-being,thus the higher the size of national income the higher the living standard of people and vice-versa provided that the income is equitably distributed.Attraction and granting of aids :
- National income enable us determine the amount of aids which countries can give to the poorer countries and also the amount of contribution a nation can make to an international body like the limited nations
PROBLEMS OF CALCULATING NATIONAL INCOME
- Double Counting: This is a major problem in calculating income estimates. How to differentiate between intermediate and final product is a problem. What to include is a problem. E.g Sometimes cost of raw materials and intermediate is added to fixed products which causes double counting.Accounting for depreciation to determine the value of capital stock and estimating the value of consumption is a problem capital consumption means depreciation.
- Incomplete information: There is gross inadequate statistics on many economics variables. Information on jobs executed by people and paid for are not readily available. Moreover, data on private expenditure are not easy to come by
- .Inaccurate population data: Statistical data on the population are inaccurate. Most countries do not know the actual number of their citizens. Therefore, information on structure and size is not available.
- Illegal transactions: Illegal transactions are very difficult to estimate. Income derived from all the illegal transactions such as prostitution and gambling are not easily determined.
- Transfer payment: These are income received but not earned or worked for. It creates problem of whether it should be recorded or note Examples of transfer payment are gifts, pensions etc.
- Effect of inflation: The total National Income will be affected by the level of inflation. It may be overestimated underestimated; therefore, giving a false impression of the National Income.
- Problems of unpaired services: The services of housewives or house helps are not easy to compute in monetary value. Others include people doing jobs for themselves e.g. painting one house.
- Subsistence production: Another problem is how to qualify or measure the value of subsistence production. This is a situation where somebody produces for self- consumption.Problem of calculating income from abroad: It is not an easy task to measure the value of net income from abroad. This is because of improper documentation in developing economies.
- Difficulty of defining a nation' s income:National income includes earnings of the nationals of a nation who resides in another foreign country. Therefore, there is the problem of defining what a nation is.
- Determinants of the size of a country's National income..The working population: the higher the working population of a country the higher the country's productivity which will likely increase its national income and vice versa.
- Availability of natural resources: a country with abundance of natural resources will experience increase in national income than a country with little or no natural resources.
- Industrial development: industrialisation influence national income the presence of industry or increased industrial activities contribute positively to
- National income.Economic stability: economic stability plays crucial role in increasing a country's national income and guarantee meaningful productivity as such economic instability decreases.
- The level of technology:they hire a country's level of technology the higher it's national income and vice versa.
- Nature of factors of production the amount of capital available the quantity of the labour Force the fertility of the land and enterpreneurship will positively or negatively affect a country's national income.
- Political situation: political stability in any country can contribute positively to National income by political instability reduces its.Availability of economic infrastructureLevel of corruption.