National Income: Definition, Uses, Problems & Limitations

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What is National Income?

National income is the monetary value of all goods and services produced in a country in a year or the totality of income accruable to all factors of production employed in producing goods and services in the year in the country such as wages, salaries, rents, interests and profits. It is equal to NNPIndirect Business Taxes.

National Income
National Income
  • Gross National Product (GNP)

Gross National Product is the value of all goods and services produced by the nationals of a country within a given year. It is the aggregate preduction of goods -and services in a countiy during a given year.

GNP = GDP M + Y

Where M = imports; X = exports.

  • Gross Domestic Product (GDP)

Gross Domestic Product is the total value of the domestic production of goods and services within the geographical boundaries of a country over a period of one year. It does not take into consideration the net product from abroad during the recording year.

It is generally easier to estimate than the GNP especially for developing countries which lack reliable statistical data.

  • Net National Product (NNP)

Net National Product (NNP) is Gross National Product (GNP) minus Capital Consumption Allowance (CCA) or Depreciation (D).

Thus NNP = GNP – CCA or GNP – D.

  • Per Capita Income

Per capita income is the average income per head of population per period of time. It is computed by dividing the national income of the country by the total population, i.e.

Per capita income = National Income
Population

It is used as a measure of the standard of living between countries.

Factors Limiting the use of Per Capita Income

  1. The choice of appropriate exchange rate is a problem in the sense that there are changes in exchange rates over time which may not necessarily reflect differences in domestic price levels in different countries.
  2. The scope of subsistence production differs and so the value of all goods and services produced may not be accurately estimated in different countries.
  3. Leisure and pleasure as well as non-material advantages enjoyed by people (which cannot be accurately estimated in monetary terms) vary from one country to another.
  4. The share of military production in total output of a national may vary from that of another country.
  5. Other factors such as cultural, social, political, etc. may make accurate comparison impossible.

Different Ways of Measuring National Income

National Income is measured in three different ways as follows:

  • The income approach – measures the sum of all incomes earned by factors of production excluding transfer payments in a given year. It is the total earnings received by factors of production for their productive efforts in the economy in a given year.

In symbolic language,

GNP = W + I + R + P + D + TB., where:

W stands for wages and salaries I stands for interest
R stands for rent
P stands for profit
D stands for depreciation
TB stands for indirect business taxes.

  • The expenditure approach – measures the total amount spent by the community on goods and services plus addition to capital goods and stocks.

Symbolically, GNP = C + I + G + (X – M)

Where: C stands for private consumption Expenditure
I stands for investment expenditure By the business sector
G stands for government expenditure
X stands for exports
M stands for imports
(X – M) stands for net export earnings.

C + I + G (X M) is also a measure of aggregate demand in the country.

The output approach measures the totality of output of goods and services produced in the economy valued in monetary terms in a year. It is the most common method of measuring the national income.

Problems of Measuring National Income

  • Problem of data discrepancies arises from the fact that national income can be measured in three different ways each of which has its peculiar problems.
  • Difficulty of measuring the subsistence production. In West Africa, much production is done for personal consumption and not for exchange market.
  • Price Index – incessant inflationary situations makes it difficult to measure accurately the values of the various economic activities in a period of time.
  • Double counting – may inflate the value of wealth. To avoid this, value added is taken into account in the output approach. Also transfer payments are excluded in the income approach.
  • Inadequate statistics – the problem of data collection is pronounced especially in developing countries of West Africa.
  • Measurement of depreciation is very difficult.

In a developing economy, activities such as currency trafficking and smuggling cannot be reflected in the national income account.

Uses of National Income

  • It is used to determine or find the structural composition of the contributions of all’factors of production.
  • It is used by nations to formulate policies for theircountries particularly development planning.
  • It could also be used to compare the rate of economic growth of a country with another.
  • The structure of production is observed at a glance while the role of government is known.
  • It serves as a basis on which comparisons of economic grth among countries would be made.
  • It is the basis on which the allocation revenuescould be made.
  • National income estimates could also influence the decisions of investors.
  • It indicates the relative standards of living of people in different countries.
  • It is the best single measure of a nation’s economic performance.
  • It is used to determine a country’s contribution to international economic organizations such as ECOWAS, IMF, etc.

Limitations in the use of National Income

  • Different concepts of income in different economic systems may create disparity in estimations.
  • Different treatment of some items such as transfer expenditure may be excluded from the estimates.
  • Different coverage of national income estimates may lead to over-or under-estimation.
  • Different pricing systems in different countries introduce distortions in the compilation of national income estimates.
  • On the international scene, the use of the dollar as an exchange rate has its own limitations which makes it unreliable in all situations.