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Economics

METHODS OF MEASURING NATIONAL INCOME

In using this method, account is taken of all the income received by individuals, firms and government within a year for their participation in production. The income received by factors of production in the form of wages and salaries, rent, interest and profits, is added together. To avoid double counting, transfer income or payments are not included. Examples of transfer incomes are gifts given to old people, students and beggars, pensions paid to old people etc. they are part of people’s income which are already counted. The income which is included must be that which arises from the production of goods and services. There must be something given out in return for a payment. Apart from not adding transfer payments, business expenses are excluded. However goods and services consumed by producers are included.

By using this approach, we arrive at either the G.N.P or G.D.P. at factor cost. This is because the total figure is found by adding up the costs (i.e. income) of the various factors of production. To get the G.N.P or G.D.P at market prices, we add taxes and subtract subsidies.

OUTPUT OR NET PRODUCT APPROACH OR METHOD: This method sees national income in terms of the monetary value of all goods and services produced by the various economics unit (individuals, firms and the government) in a year. In this method, national income is measured by adding together the value of the net contributions of the various sectors or enterprises (both private and public) in the country. To avoid double counting, income is measured on a value added basis (Value-added is the value of output, less cost of inputs). For example, the cost of raw materials such as flour and sugar used in making bread must be subtracted from the value of bread to get the net contribution of bakeries to national output.

In addition, the value of exports is included while the value of imports is subtracted. Also, the value of goods and services produced and consumed by the producer they are included. The values of owner-occupied houses are included. In these cases, rent is imputed. The value of service rendered by voluntary organisations, house helps and housewives should be included. The value of public services such as defence and justice are included.

National income derived in this way gives the GDP at market price. To get the GDP at factor cost, we subtracted taxes and add subsidies.

EXPENDITURE APPROACH OR METHOD: This method of measuring national income measures the total expenditure on goods and service by individuals, firms and government in a country within a given period. In using this approach, it is necessary to avoid double counting by identifying expenditure (consumption or investment) of a final nature. For example, in calculating the value of bread, which is a final consumption type of goods, we shall take care not to add the final price of bread the price of flour, sugar, yeast, and other ingredients used in making bread.

In addition, transfer payments such as pensions paid to retired workers, gift to beggars etc,are not included.

Formula for calculating national income using expenditure approach or method.

N.I = C + I + G + X – M + subsidies – taxes – depreciation

Where:

N.I = National income

C = Private consumption expenditure

I = Private investment expenditure

G = Government expenditure on consumption and investment

X = Exports

M = Imports

Example:

Methods Of Measuring National Income Of A Country

INCOME APPROACH (INCOME METHOD)

In using this method, account is taken of all the income received by individuals, firms and government within a year for their participation in production. The income received by factors of production in the form of wages and salaries, rent, interest and profits, is added together. To avoid double counting, transfer income or payments are not included. Examples of transfer incomes are gifts given to old people, students and beggars, pensions paid to old people etc. they are part of people’s income which are already counted. The income which is included must be that which arises from the production of goods and services. There must be something given out in return for a payment. Apart from not adding transfer payments, business expenses are excluded. However goods and services consumed by producers are included.

By using this approach, we arrive at either the G.N.P or G.D.P. at factor cost. This is because the total figure is found by adding up the costs (i.e. income) of the various factors of production. To get the G.N.P or G.D.P at market prices, we add taxes and subtract subsidies.

OUTPUT OR NET PRODUCT APPROACH OR METHOD: This method sees national income in terms of the monetary value of all goods and services produced by the various economics unit (individuals, firms and the government) in a year. In this method, national income is measured by adding together the value of the net contributions of the various sectors or enterprises (both private and public) in the country. To avoid double counting, income is measured on a value added basis (Value-added is the value of output, less cost of inputs). For example, the cost of raw materials such as flour and sugar used in making bread must be subtracted from the value of bread to get the net contribution of bakeries to national output.

In addition, the value of exports is included while the value of imports is subtracted. Also, the value of goods and services produced and consumed by the producer they are included. The values of owner-occupied houses are included. In these cases, rent is imputed. The value of service rendered by voluntary organisations, house helps and housewives should be included. The value of public services such as defence and justice are included.

National income derived in this way gives the GDP at market price. To get the GDP at factor cost, we subtracted taxes and add subsidies.

EXPENDITURE APPROACH OR METHOD: This method of measuring national income measures the total expenditure on goods and service by individuals, firms and government in a country within a given period. In using this approach, it is necessary to avoid double counting by identifying expenditure (consumption or investment) of a final nature. For example, in calculating the value of bread, which is a final consumption type of goods, we shall take care not to add the final price of bread the price of flour, sugar, yeast, and other ingredients used in making bread.

In addition, transfer payments such as pensions paid to retired workers, gift to beggars etc,are not included.

Formula for calculating national income using expenditure approach or method.

N.I = C + I + G + X – M + subsidies – taxes – depreciation

Where:

N.I = National income

C = Private consumption expenditure

I = Private investment expenditure

G = Government expenditure on consumption and investment

X = Exports

M = Imports

Example:

The following is trading account for Nigerian in the year 1978 (one millions).

Government expenditure on goods and serviceN 15.6m
Citizens’ private expenditureN35. 0m
Various stocks at homeN 11.8m
Exports income from abroadN 13.5m
Imports income paid abroadN 10.4m
Taxes on expenditureN 7.0m
Capital consumptionN 5.8m
General subsidiesN 1.3m

From the information given above, calculate the national income for Nigeria for the year 1978.

Solution

Expenditure                                                                                                                 (N M)

  • Citizens’ private expenditure = 35.0
  • Government expenditure on goods and services = 15.6
  • Stocks at home = 11.8
  • Exports income = 13.5
  • General subsidies = 1.3
  • TOTAL                        =77.2

Less

  • Import’s income   =10.4
  • Taxes        =7.0
  • Capital consumption =5.8

TOTAL  =23.2

National income = N 77.2m –  N 23.2m

N 54.0m

OR

N.I = C + I + G + (X – M) +subsidies – Taxes – Depreciation (or capital consumption)

N.I = N 35.0 + 11.8 + 15.6 + (13.5 – 10.4) + 1.3 – 7.0 – 5.8

= N 54.0m

PROBLEMS OF MEASURING OR COMPUTING NATIONAL INCOME

  1. Difficulty of measuring the subsistence production. In West African, which production is done for personal consumption and not for exchange market.
  2. Double counting: It may inflate the value of wealth to avoid this; value added is taken into account in the output approach.
  3. Transfer payment: These are par of income which is given to others freely, and not as a result of their participation in production. Examples are gifts to beggars and old people, pension payments etc. Sometimes some of these transfer payments are mistakenly recorded as part of income.
  4. Inadequate data: Most West Africa countries are faced with statistical problems relating to lack of data or to inaccurate data. Many people who are self-employed, especially the small scale producers do not keep any records of their output (income) or consumption (expenditure).
  5. Effect of depreciation: In calculating the net national income, it is necessary to know the rate of depreciation. It is not easy to know the actual value of depreciation of capital.
  6. Payment in kind: Many payments are made with materials objects rather than money and it is not easy to calculate the value.
  7. Changes in the value of money.

Assignment (Post your answer and question title using the box below for evaluation and discussion):

State 5 ways of National Income estimate

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