How to Measure National Income with Examples
What is National Income?
Just as you are conscious about the level of your income, it is imperative for a country to comprehend its income to facilitate national planning and to improve and maintain an exemplary standard of living.
In the yesteryears, African people would state their income and hence wealth by counting the number of domestic animals owned and the expansiveness of their land. In the modern world, economic worth is estimated with the amount of income you earn. Your capacity to engage in more resourceful activities (borrow loans, attain higher education, travel abroad, etc) in the economy is determined by your personal income. In the same vein, the country cannot progress without knowing its national income. It will only borrow from donors, attract investment, and spend well on public goods when it can estimate its income.
Can you imagine existing without knowing your state or level of wealth? What would happen?
Let’s analyze the concept of national income and its importance.
National Income a measure of the total monetary worth of final services and goods arising from productive actions of a nation within one year. But how do we explain the concept of national income? Let’s look at various concepts used.
What is Gross Domestic Product?
This is the first and most widely used measurement of national income.
Gross Domestic Product-GDP is the entire financial value of all the final services and goods that are produced in the geographic borders of a country. Therefore GDP of Kenya includes incomes earned from goods and services from citizens in Kenya and all foreigners living in Kenya only.
Gross National Product It is thought to be a more accurate measure of national income than GDP. Gross National Product is an expression of the total monetary value of all goods and services produced by the nationals or citizens of a given country. You can, for instance, say its products and services provided by citizens in Kenya and Kenyans living abroad. GNP focuses only on output produced by a citizen of a country who lives within and outside the country. We can also have a more accurate estimation of national income by reducing and adding other factors that distort the correct estimates.
How to Measure Gross Domestic Product
We have to reflect that- a GNP figure doesn’t think that some goods run down due to tear and wear. It is also crucial to consider that GNP is arrived by multiplying price and quantity of goods and services generated by Kenyans in Kenya and outside Kenya. The rates usually incorporate indirect taxes (customs duty, VAT, etc). Therefore we can say that prices are slightly higher due to taxes, hence if we reduce them we can get more realistic prices and GNP will be more accurate.
Sometimes the government may give some form of assistance to producers in terms of inputs, cash, etc. Farmers are usually subsidized through fertilizers, pesticides, etc, but subsidies are not paid back. They are free and not included in the prices since producers need not repay them. Therefore we need to add them in GNP figure to make it more realistic as they facilitate production of goods and services.
The labor used to produce goods and services is also usually taxed through direct taxes such as PAYE. These taxes are costs that are passed on through prices. Therefore, if direct taxes were not there, then prices would be much less. Hence, we need to reduce direct taxes to get a more accurate figure of the national income.
In many countries, we have persons who receive incomes from the Kenyans working outside Kenya-net transfer receipts. No goods or services have been produced in Kenya to come up with such profits. They could also be going to the government, hence should be deducted. The net figure after all the additions and subtractions should give us the national disposable income.
What is Per Capita Income?
Now you have seen how we can conceptualize national income from various perspectives. After estimating national income, we can also tell the average income of all citizens in a country by deriving the Per Capita Income amount. Per Capita Income is the national income divided by the total population of the country. It represents the average income of the people in a given year income per head.
Importance of National Income Statistics
When we want to have a nutshell of wellbeing in a country, we use national income statistics as our most natural parameter. By understanding the highest and the lowest national income statistics, we are able to have a figment of imagination about the state of well being in a country. They serve as primary indicators of the material well being of the people.
You may have heard people complain that the GDP is increasing, but the actual standards of living do not reflect the GDP increase. Let’s explore some limitations of the national income concept to answer this question.
Limitations of National Income Statistics
1. Consider Illegal Activities
Activities such as drug trafficking, human trafficking, production of counterfeits generate enormous amounts of money. However, they are not captured when calculating national income because criminals do not want to be known, and the chances of paying taxes or registering their businesses are remote.
2. Domestic Services
Domestic services such as house help services, lawnmower activities, etc. are usually not well registered with government authorities, yet they generate income and livelihoods for many thus not captured in national income estimation.
3. Level of Accuracy
Estimates of the value of the informal sector, population, and depreciation are rarely accurate.
What other limitations do you think exist in the national income concept in trying to serve as an indicator of standards of living?
What is National Equilibrium Concept?
Let’s now examine the concept of the equilibrium level of national income. National equilibrium is not really a necessity to strive for, but it helps us to understand the dynamics of output in the economy.
The equilibrium level of national income is the level of national income which exhibits no tendency to change.
How do we reflect on this concept?
We can say aggregate demand in the economy consists of household consumption(C), private sector investment (I), government spending (G), and export(X) minus imports (I). Hence, (AD=C+I+G +X-M). It is a representation of the goods and services needed to satisfy wants in the economy.
On the other hand, the total value of goods and services is measured by national income. Income by citizens received is spent either on consumer goods or withdrawn in terms of savings and taxes. Hence, (Y=C+S+T).
You can logically conclude that in an ideal situation, all incomes earned in the economy will be spent on all goods and services produces. Therefore at equilibrium, we can say;
Since at equilibrium level of national income Y=AD (E), i.e. Aggregate demand = national income
Then, C+ I+ G +X – M = C+ S + T
C+ I+ G +X – M = C+ S + T
The C cancels out. Hence,
= I + G + X=S+T+M
Investment, government spending, and exports are known as Injections into flow of national income. Savings, taxes, and imports are withdrawals into flow of national income. At equilibrium, withdrawals should be equal to injections. Equilibrium income occurs when desired aggregate expenditure equals to output and withdraws being equal to injections.
The Sectors of an Economy
An economy can be analyzed from various perspectives. One of them is dividing it into sectors, i.e.,
C + 1 is known as the frugal economy (2 sector economy).
C + 1 + G is known as Governed economy (3 sector economy).
C + 1 +G +(X-M) is known as an open economy (4 sector economy).