Economics

WEEK THREE

National Income can be computed in three ways.

1. Income method
2. Output method
3. Expenditure method.

1.INCOME METHOD: This is obtained by adding income received by all factors of production, such income are wages for labour, profits made by entrepreneurs, interest from capital and rents on land. In other to avoid double counting, transfer payments such as money given to old people, beggars, students etc. are not included or counted.

2. OUTPUT METHOD: This method is otherwise known as Net product method or value added method. This method measures the total monetary values of all goods and services produced in a country over a year. In other to avoid problems of double counting, income is measured on a value added basis. Value added is the value of output, less costs of inputs. Therefore, national income is measured by adding together the net monetary value of all goods and services produced in the country.

3. EXPENDITURE METHOD: This method measures the total expenditure on goods and services and investments by individuals, firms and government in a country. In order to avoid double counting in this method, it calculates only expenditure on final goods and services plus net export transfer payment such as gifts to beggars, payment to retired workers are not included.

Formula for calculating national income using expenditure method is:

Y= C+ I+ G +(X - m) + subsides - taxes - depreciation (or capital consumption).

Where, Y= National income, C=Consumption expenditure, I=Investment expenditure, G=Government expenditure, X=export, m=Imports, (x - m) = net export.

Example:

The following is the trading account for Nigeria in the year 2014(in millions):

a. Citizens private expenditure=#40m

b. Government expenditure on goods and services=#17.5m

c. Various stock at home=#10.75m

d. Exports income from abroad=#12.50m

e. imports income paid abroad=#11.75m

f. Taxes on expenditure=#9.00m

g. Capital Consumption=#6.20m

h. General subsidies=#0.75m.

Question; Calculate the National income from the information given above?

Answer;     Y=C + I + G + (x - m) +Subsidies – Taxes - Depreciation.

= #40m + #17.5m + #10.75m + (#12.50m - #11.75m)+0.75 - #9.00m - #6.20m

Y= #53.875m.

     Reasons for measuring national income.

1. It shows standard of living: National income gives an indication of the standard of living of the country through the measure of per capita income
2. It determines the growth rate of the economy: National income is calculated for the purpose of determining the growth rate of the economy.
3. For comparing standard of living with other countries: National income is calculated to compare the standard of living of a country with the other country.
4. It influences foreign investments: An estimate of national income gives a foreign investor a rough idea about the growth and development of an economy. Therefore, foreign investor will seek a country with Rich and fast growing economy.
5. Contribution in international organization: The estimated national income of a country helps the country to know the rate at which it contributes to international organizations such as United Nations, common wealth of nations etc.

     Problems of computing national income.

1. Inadequate data: This is a statistical problem relating to lack of data or inaccurate data. Most people who are self-employed do not keep accurate records of their income and expenditure which hinders the proper computation of national income.
2. Double counting: This involves counting the values of some commodities twice or more and this gives false national income estimates.
3. Subsistence production: The predominance of subsistence production in Nigeria where a larger part of production is for self-consumption makes national income accounting difficult.
4. Inability to quantify some service: Some services are not easily quantified, thereby affecting the national income estimates e.g. housewives services.
5. Effect of depreciation: It is difficult to ascertain the actual value of depreciation of capital which affects the national income accounting.

Exercise:  1. Highlight any five uses of national income in the economy    (5mks

                  2. Given the NDP as #450m and Depreciation #75m. What is the value of G.D.P? (3mks)

                  3. What do you understand by ‘’Depreciation”?  (2mks)

WEEK TWO

Meaning of National income accounting: National income accounting may be defined as the means of calculating the monetary value of total goods and services produced or the total income accruing to all factors of production in a country over a period of time, usually a year .The income accruing to all factors of production includes payment made to all factors of production such as wages, interest, rent and profits.

MAJOR NATIONAL INCOME (NI) CONCEPT.

1. Gross Domestic Product (GDP): This is the total monetary value of all the goods and services produced in a country at a particular period of time but excluding net income from abroad. The calculation includes earnings of citizens, foreigners and foreign investment within the country but exclude the earnings of citizens or their investment abroad.

2. Gross National Product (GNP): This is the total monetary value of all goods and services produced in a country at a particular period of time including net income from abroad. The calculations includes the earnings of the citizens or their investment in the country.

3. Net Domestic Product (NDP): This is the total monetary value of goods and services produced by all residents and earnings from their investments (both citizens and foreigners) after allowance has been made for depreciation.

It is GDP less Depreciation.

4. Net National Product (NNP): It is the total monetary value of goods and services, produced by all citizens of a country and income from their investments (both citizens at home and abroad) after allowance has been made for depreciation. It is GNP less Depreciation.

5. National Income: It is the monetary value of all goods and services produced or the total income accruing to all factors of production in a country over a period of time usually a year.

6. Personal Income (PI): It is the total income of money received by individuals over given period of time.

7 .Per Capita Income: It is also known as income per capita, it is the average income of an individual in a given period of time. It is obtained by dividing the national income by the population of the country in that year.

8. Disposable Income: This is the amount of personal income that is left after the deduction of personal income taxes. It is the amount left for spending and saving.

Disposable income = personal income - personal income tax.

USES OF NATIONAL INCOME.

1. Economic planning: National income provides the basic and comprehensive data on the contribution of various sectors of the economy to National output. These data is therefore use for economic planning.

2. Assessment of economic performance: The national income statistics are used in assessing the performance of the economy in order to know the effectiveness of the productive resources.

3. for future forecast: The data from national income can be used to forecast the future of economic growth and development in a country.

4. Redistribution of income: The contribution of the various sectors of the economy through national income helps the government to design policies towards redistributing national income and allocation of resources and revenue among sectors within the nation.

5. Index for classification: It is used to classify nations to under-developed, developing ND developed one through their standard of living.