The purpose of
economic activities is the production of goods and services and a look at a
modern economy
will reveal that its
output is an endless flow of goods and services. As a result of the cooperation
of factors
of production during
a particular period, a certain output of goods and services is achieved. It is
common that
factors of production
are generally paid for their services in money, these payments being variously
known as
rent, wages, interest
and profit. These four types of payment are income and all incomes are received
by
someone.
The important thing
in any economy is that the total income of a community or the economy depends
on
the total volume of
production. If people are to understand the behaviour of the modern economy,
there is
then need to measure
its performance. There are needs to measure the total output of goods and
services and
also the total income
received by all the people in the economy. This unit will look at the national
income i.e.
the total income of a
nation, the measurement of the national income of many nations, the problems
encountered
in the measurement of
national income as well as the uses of National income statistics.
Meaning of National Income, Personal Income and Disposable Income
(1) National Income
National income means
the total compensation of the elements used in production (land, labor, capital
and entrepreneurship)
which comes from the current production of goods and services in the economy.
It is the income
earned hut not necessarily by all persons in the country in a specific period.
It consists of wages, rents, interest, profits and the net income of the
self-employed. In other words, national income is the market value of all goods
and services produced in a country over a specified period of
time usually one
year. It is important to unit that national income can be classified according
to the industry in which it originates, such as mining, manufacturing and
construction.
(2) Personal Income
This is the amount of
current income received by persons from all sources, including transfer
payments
form government and
business. It is the total income the people in an economy usually receive i.e.
their
actual receipts from
all sources. Personal income also includes the net incomes of unincorporated
business and
non-profit institutions and non-monetary income such as the estimate of the
value of
homes occupied by
their owners. The major monetary components of personal income are labor
income, rental
income, proprietors income, dividends, interest and transfer payments.
3. Disposable Income
The disposable income
refers to the income that individuals retain after they have deducted personal
income taxes.
Disposable income is the concept closets to what is commonly known as take-home
pay.
It is the amount
which individuals can use either to make personal outlays or to save. It is the
amount of
income actually
available for the individual in an economy to use in purchasing goods and
services for
consumption. Disposal
income tends to differ from personal income because of personal income taxes.
These taxes
arbitrarily removed a portion of the personal income received by individual and
thus leave
a smaller amount for
disposal by the income recipients.
Measurement of National Income
The national income
of any country can be measured in three different ways; the output method or
G.N.P.
approach, the income
method and expenditure method.
1. The Output Method
or GNP Approach
In the output method or
G.N.P. approach, the national income is arrived at by adding together the
market value of all
the output of goods and services in a country and net income form abroad less
capital consumption
allowance. In this method, the Gross Domestic Product (GDP) is first arrived,
at
then the Gross
National Product (GNP) and finally the national income.
The Gross Domestic
Product (GDP) is the total value of all the goods and service produced in any
economy of country in
a particular year. The Gross National Product (GNP) on the other hand is the
gross domestic
product plus net income from abroad i.e. the value of exports less the value of
imports.
When the capital
consumption allowance is taken away from gross national products, what is left
is the
national income. An
illustration of this with some figures will help to make the explanation
clearer.
2. The Income Method
This is the method of
calculating the national income by calculating the incomes of the four factors
of
production. In the
method, the total income earned by business organization s and individuals
during a
period of one year
are added up. The addition got is known as the national income at “factor
cost”, the
total cost attributed
to all factors of production employed. In other words, national income at “factor
cost” include the
total of all wages, salaries, rents, dividends and interests received. It also
includes
income in kind. The
income of entrepreneurs and profits of companies before deduction of taxes.
This
then means that
adjustment has to be made.
ADJUSTMENT: In
practice income figures are obtained from income tax figures. Therefore, an
adjustments to be
made.
a . Transfer Income
Sometimes an income
is received without any corresponding contribution to the output of goods and
services e.g. unemployment
insurance benefits, retirement pensions, students grants included in the
national income
figures should not be there because they do not add to the output of goods and
services.
They only represent a
redistribution of income within a nation. It has to be noted that the
usefulness of
this method is
limited in West African by the existence of tax evasion and the refusal of many
individuals
and firms to make
correct returns of their income.
3. The Expenditure
Method
The third method of
obtaining the national income is through the expenditure method. This is the
calculation
of expenditure
incurred by individuals and the public. In other words, this method measures
the
total amount spend on
consumer goods and services and net addition to capital and goods and stocks in
the course of the
year which can be referred to as savings.
It is important to unit
that in theory, any of these methods used will give the same result. The reason
is
that the expenditure
on goods and services must equal the sales value of those goods and services.
This
in turn must be equal
to the amount of money paid by firms as wages, salaries, interests, dividends,
rent
and undistribution
profit. But in practice, measurement problem can result to differences in the
figure
obtained from the three
methods.
The Need for Regular Measurement of National Income
The fact that the
measurement of national income is not a simple exercise makes some people ask
why
nation should embark
on such painstaking exercise. Nevertheless, there are many good reasons why the
national income of
every country should be measured yearly. Some of the reasons include:
(1) The Volume of
Production Determines a Nation’s Economic Well-being
The fact that the
volume of production determines the economic well being of any nation makes it
more
than necessary for
any country to measure its national income. National income is a good indicator
of
economic progress as
well as good measure for a standard or living of people in a country.
(2) National Income
is an Important Instrument of Economic Planning
A country needs to
know the trend of business activity in the economy so as to make adjustments in
its
planning. There is
need to know the proportion of national agriculture, industry, mining,
services, etc.
The knowledge of this
will help to determine where greater efforts should be directed. This is based
on
the fact that one
year’s achievements will form the basis of plans for the following year.
(3) National Income
helps to determine the Economic Strength of different Nations
Measurement of
national income is very important because that helps to determine the economic
strength
of different
countries, and this again will help to find out the countries that may need
economic assistance.
(4) National Income
is Necessary to Determine Different Countries Contributions to International
Institution
The measurement of
national income is very vital for equitable assessment of different nations.
Contributions
to international
institutions such as the United Nations Organization , Organization for African
Unity and Economic Organization
for West Africa States.
Factors Determining the Size of National Income
Some countries have
larger national income than others. There are a number of factors that
influence the
size of national
income of any country. These factors are:
(1) The Stock of
Factors of Production
One of the factors
that influence the size of a country’s national income is the quality and
quantity of the
factors of
production. Land for an example may be fertile or infertile and this will
greatly affect the
productivity and
national income. The quality of labor will depend on education and training
which will
equally affect the
productivity. Equally the extent of a country’s stock of modern forms of
capital
determines the total
volume of production.
(2) The State of
Technology
The second important
factor in determining the size of a country’ national income is the state of
technology. The national income of any country increases as the country’s state
of technology improves.
For example, the
national income of Great Britain increased tremendously after the Industrial
Revolution
of the 18th century
as a result of the introduction of new method of production both in industry
and
in agriculture. Also
the national income of some West African countries increased recently as a
result
of the introduction
of modern technology.
(3) Political
Stability of Instability
Political stability
is very essential if highest level of production is to be maintained. Political
instability on
the other hand has
been a great hindrance to the output and development of many countries of the
world, especially the
countries of West Africa and South America who suffered setbacks in their
economic progress as
a result of political instability.
(4) Natural Endowment
The gift of the
nature is one of the things that make some countries to have greater national
income than
others. For an
example, Kuwait which is one of the smallest countries of the world has greater
national
income than the
majority of the countries of the world. This is as a result of huge, deposits
of crude oil
in the country which
is not the handiwork of any human being. Countries with huge deposits of
important
mineral resources
have far greater national income than other countries not having any of such
mineral resources.
(5) Willingness and
Development to Duty
The willingness and
devotion to duty of the people in a country will in no small way increase the
national
income of that
country. When people are willing to work and devote their entire energy in the
production,
productivity will be
increased and this will subsequently increase the size of national income. In
the
past, the Nigerians
looked at the civil service work as ‘Oyinbo’ work and as a result, productivity
was
very low.
Some Difficulties in Measuring National Income
Certain difficulties
are encountered in measuring the national income. These difficulties are of
different
nature and they
include:
(i) Information is
not Always Available
While some agencies
provide some figures and information needed for the calculation of national
income,
others not available
have to be estimated. Some people do refuse to give any information about
their income by
refusing to fill the income tax form. Under such a situation, there is nothing
to be done
than to base
everything on some estimate. More estimate will never give an accurate
measurement of
national income.
(ii) The Problem of
Double Counting
This particular
problem arises when the price of raw material is counted and at the same time
the cost
of production and
finished goods are included in the calculation. Care must be taken to avoid
such
double counting so as
to arrive at an accurate figure. In this case, only the price of the final
product
should be taken, or
the sum of the values added during the process of production.
(iii) Unpaid Services
In the process of the
production of goods and services some services are not paid for. In measuring
national income,
therefore, only those goods and services for which payment is made are taken
into
account. Services
which people for themselves; friends and neighbours are not included. This
means
that where there is
greater division of labor, national income will be greater even when there is
no
increase in the
actual out-put.
(iv) Foreign Payments
Income usually comes
from abroad in the form of dividends, interest on foreign government stock and
payment from export
and income also goes out to foreign countries in the same way. The different
between the foreign
receipts and payments made to foreign countries which is called net income from
abroad must be added
in other to get the national income. When this is ignored, wrong figure will be
arrived at.
(v) Changes in the
Value of Money
The value of money is
not steady and as a result of this, comparison between national income of one
year and another is
difficult to make. If the prices of goods and services go up by 5%, the
national
income will increase
by the same percentage even if the same amount of goods and services produced
in the previous year
is produced in the current year.
(vi) Depreciation
Depreciation means
the reduction in the value of an asset through wear and tear. An allowance has
to
be made for this in
the calculation of national income. The main problem here is that sometimes, it
is not
easy to calculate the
exact amount of depreciation of some equipment and other assets due to the fact
that the rate of wear
and tear is not the same throughout the life span of the asset.
(vii) Payment in Kind
There are some people
who are paid in kind for their services. The value of such payments cannot be
calculated easily.
Again in some places, farmers sometimes retain some of their products without
bringing them to the
market. Usually no account is taken of such goods and this normally leads to
incorrect accounting
of national income. The value of all payments in kind is supposed to be
included in
the calculation of
national income.
Why West African Countries have Lower National Income Figures than
Developed Countries
The national income
figures of West African countries are very small when compared with those of
the
developed countries
of Western Europe and the United States of America. There are some reasons
behind
this situation and
then include the following:
(i) The Stage of
Economic Development
The state of economic
development is very important in determining the size of national income. The
countries of Western
Europe and the United States are more developed and highly industrialised and
therefore, have more
national income than the countries of West Africa.
(ii) Shortage of
Capital Goods and Funds
The relative shortage
of capital goods and funds in West African compared with the highly developed
countries accounts
for lower than national income in West Africa. Capital is an important factor
of
production which can
raise both productivity and national income in any country.
(iii) Limited
Exploitation of National Resources in West Africa
Most of natural
resources in West Africa as well as other developing countries are not fully
exploited as
in United States of
America, Japan or Western Europe. As a result of this, some natural resources
are
lying idle in some of
these countries which if fully exploited could have helped to raise the
national
income figures of
such countries.
(iv) Labor in West
Africa is not Highly Skilled
While many countries
of West African have abundant supply of unskilled labor, some lack skilled
labor. This situation
leads to lower national income because skilled and well-trained man-power
enjoys
higher pay than
unskilled man-power. But with the establishment of many secondary schools and
institutions
of higher learning,
reasonable proportion of West African labor force is now skilled.
(v) Political
Instability in West Africa
Political instability
which characterised West Africa for many years now does not create healthy
climate
for foreign
investments which are essential for increase in productive capacity and
national income.
The fear of
nationalisation of foreign owned businesses discourages foreign investors in
West
Africa.
The Uses of National Income Statistics
The use of national
income statistic are not unique for any particular type of economy or any
region. They are
relevant to all
countries both developed and undeveloped. Some of the uses of national income
statistics are
as follows
(i) National Income
Statistics are used for estimating per capital income of a country. They give
us a
summary of
appropriate changes overtime in the per capital income and overcall standard of
living.
(ii) The national
income statistics can give the structure of production at a glance, i.e. the
items that make
up the national
income are clearly shown. This will help to know the combination of each sector
in the
economy to the
national income of the country in question.
(iii) National income
statistics are useful in the formulation of fiscal policy. The figure of the
previous year
are compared with the
current year and on the basis of this, a forecast on the state of the national
economy is made for
the coming year.
(iv) The national
income figures present the best method used in measuring economic growth. They
show
the progress made in
each sector of the economy by giving the clear picture of the anticipated and
realized rate of
economic growth.
(v) The national
income figures can be used in comparing the living standard in one country with
that of
another, especially
when the countries are in the same level of economic development.
(vi) National income
figures can influence the decision of foreign investor, e.g. an investor may
like to
establish an industry
where there is high per capital income as that will induce greater demand for
the
product of the
industry.
The Limitations of the Uses of National Income Statistics
(i) For the domestic
and international comparison, it is necessary to bear in mind that the standard
of living
is not merely
measured by the amount of material goods available in the economy or even
available to
individual. There are
other things that contribute to the standard of living of people in a country
such as
the health condition
of the people; the amount of leisure time for the average worker, political and
religious freedom.
(ii) There are some
unnecessary assumption that should not be allowed to exist e.g. if there is a
10%
increase in the GNP
of a country, there is always a tendency for people to think that the people’s
wellbeing
or standard of living
has increased by the same percentage. Economic growth may occur but it
may not lead to
economic development of the country.
(iii) Specialisation may lead to higher
national income figure when actually there is no increase in the output
of goods and
services. Where there is no specialisation, people can do certain works for
themselves
and no payment can be
made so as to include it in the national income calculation. But with
specialisation,
it will be difficult
for one to do some other things for himself rather he will empty the services
of a
specialist which will
necessitate payment and inclusion in the national income figure.
(iv). In developing
countries, most of the agricultural products are consumed by the producers and
as such
their values are not
known because they did not find their way to the market. In such a country, the
national income
figure, is seen to be very low where as in actuality is not so. The value of
national
income in such a
country will be highly higher that what records show by the value of the amount
of
goods consumed by the
producers.
(v) When comparing
the changes in the standards of living, the average income per head. i.e. per
capital
income, may be a more
valuable indicator than total national income. This is because the national
income figure may
rise but the population may rise more in the percentage, increase in population
may
be greater, making
the per capital income to be lower and consequently the standard of living of
people.
(vi) Finally, the
basis of the statistics may vary from country to country. The proportion of
goods and
services not reaching
the market is likely to be much greater in a developing country than in a
developed
country and again the
transport expenditure in a place where there are no mass transit services will
definitely be higher
than in a country where there is highly developed mass transit facilities.
These
differences will make
the use of national income figure for international comparison of the standard
of
living useless.
Conclusion
In the previous units,
we learnt that the purpose of economic activity is the production of good and
services
and the output of a
modern economy is an endless flow of such utilities. As the creation of both
goods and
services is counted
as production by the economist then no distribution is made between the work of
a farm
laborer, a skilled
physician a shop girl or a lorry driver. Thus a manufactured commodity is
“produced’ in the
economic sense at
every stage of its journey from its basic ingredients to its sale across the
counter. Potatoes,
wheat, fish, coal,
natural gas, pig, iron sheet, steel, motor cars, tractors, roads, medical
services and a
million other items
as well as a host of services are produced in Nigeria in any year. It would be
possible with
a great deal of
effort to draw up an inventory of the goods and services produced in one actual
year, but such
a list would be of
little economic significant as it would be so complex that comparison with
earlier years or
other economic would
be impossible.
If all the good and
services produced in a given year were reduced to
their monetary value
that they could be added to give the value of total output for that year, this
is called the
gross national
product (GNP). This concept is one of the most important economic indicators
and is frequently
mentioned in
parliament and the press. Its correct economic definition is the aggregate
value of the
goods and services
produced during the year by the factors of production within the economy plus
the net
income from abroad.
The GNP is more popularly known as the national income and it is occasionally
called
the national
expenditure.
Therefore, the
national income of a country is the record of all economic activities during
the course of a
year. In more
specific terms, it is the market value of all goods and services produced in
any economy during
a particular year.
There are three ways
of measuring the national income. These are
(a) the product
approach
(b) the income
approach
(c) the expenditure
approach
The expenditure have
three approaches, they should normally give the same figure for national
income;
There are a number of
difficulties encountered in an attempt to measure the national income of a
country.
Some of the problems
are conceptual while other are practical resulting from the under developed
nature
of the economy.
- The first problem
is to decide on what to include in the calculation and what to exclude.
- A second difficulty
with national income measurement rendered by consumer durable goods.
- Thirdly, there are
some activities which produce goods and services and generate incomes but which
are excluded in
national income calculation because they are illegal. Good examples are armed
robbery
activities, gambling
and prostitution.
- Fourthly, often
inadequate information leads to errors in national income calculation.
- Fifthly, the way
depreciation is treated constitutes another difficulty.
- Perhaps, the real
difficulty in national income calculation is in the danger of double counting.
- In the seventh
place, there is the problem of owner-occupied houses, an accurate data
collection is a
difficult track, some
production systems are subsistence, technical expertise for collecting,
national
income data is
lacking and this makes the publication fit an irregular affair and finally a
significant
proportion of the
Nigerian population are self-employed and they include traders and market women
who are illiterates.
These people do not usually keep accounts of their businesses and this makes it
difficult to
calculate their incomes.
The figures obtained
from national income computations have a number of uses. The per capital income
is
sometimes used in
comparing the standard of living of countries. The national income show the
contribution
made by various
economy. National income estimates also enables economic plans to compare the
performance
of the economy over
the years. It is used in deciding how much revenue should go to particular
states
or regions, and also
enables a country to contribute to international organization s like United
Nations, IMFS,
etc.
Summary
In this unit, we have
succeeded in looking at the national income, i.e. the total income of a nation,
the
measurement of the
national income of many nation, the problems encountered in the measurement of national income as
well as the uses of national income statistics.
0 comments:
Post a Comment