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The concept of national income


Date Posted: 8/19/2018 5:06:33 AM

Posted By: Faimus  Membership Level: Gold  Total Points: 1012

National income refers to the amount earned from the factors of production available in a country during a certain period. The figure for national income can be computed using three different approaches. These are the expenditure approach, income approach and product or output approach. Using the expenditure approach, national income is the sum of all the market expenditures by final consumers including the purchase of capital goods by the business commonly. It is however critical to note that only final goods and services are involved in this approach. Using the income approach, national income is the sum of all the incomes by firms and households. These are in the form of wages, salaries, profits and interest. Payments made to people who do not offer any goods or services known as transfer payments are not included in this approach. Using the product or output approach, the contribution of all individuals at each stage of production is added to the total output plus the value added of each industry in the public, private and subsistence sectors to obtain the figure for national income. It is important to note that only net output is included in this computation. This method is in also referred to as the value added approach.

Other concepts that are closely related to national income are Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product (NNP), per capita income, personal income and disposable income. Gross domestic product refers to the total money value for final goods and services produced in a country during any given period usually a year while Gross national product refers to the total money value of the final goods and services produced by the factors of production owned by a country's nationals in any given period regardless of where they are located. Net national

product, on the other hand, refers to the total output of consumer goods produces by residents plus the net increase in the economy's total capital stock during any given period. Net increase in the economy's total capital stock refers to the new capital goods produced in excess of the depreciated capital goods. Per capita income refers to the national income divided by the total population of a given country. Personal income refers to the total income to individuals and households from all sources before taxation while disposable income refers to the amount of income available for use by households. It is also defined as the after tax personal income. All these concepts are related in that it is from having the figure of one that the figure for the next can be computed. National income is obtained by subtracting indirect tax less subsidies from the net national product.

The size of national income is determined by a number of factors. These include the stocks of the factors of production in terms of both quality and quantity, state of technical knowledge, participation rate and political stability. The stocks of factors of production should be readily available and should also be sufficient to meet the production needs. They should also be of high quality so that the final products are also of high quality. Under the state of technical knowledge, the available labour is evaluated to see if it suits the needs of production that is is the labor is skilled or unskilled and whether technology should be incorporated in production. Participation rate examines the proportion of the economically active group compared to the general populace and the effects of that proportion on the size of the national income. Political stability examines whether country is politically stable or not. This is because the political climate of any given country affects consumer expenditure, investment among other factors which are all key in determining the national income.

National income accounting which is done with the aim of obtaining the figure for national income gives key information about the economy of a given country. National income accounting highlights information about various sectors in the economy of a given country. For instance, Gross national product gives information on sectors such as consumer expenditure, taxes and investment. This information is important in ensuring that the various markets in the economy such as the product and money markets are in equilibrium. In addition is important as it helps the government to put in place measures to ensure that the domestic currency remains strong against other currencies. National income accounting also highlights information about the performance of the economy over time. This is achieved through the computation of figures for annual growth rates. This information together with the use of the verified macroeconomic theories in place, economists can accurately forecast the future of the economy and make vital decisions on the measures that should put in place to achieve better economic performance of the economy of a given country. National income accounting is also an indicator of the structural change (transformation) in the economy of a country.

There are various difficulties that are involved in measuring the national income. These include; incomplete information, danger of double counting, unpaid services, depreciation, inventory valuations and changes in the value of money. The case of incomplete information occurs whereby some information is not available or may not be accessible. If this information is vital then the national income cannot be measured. Cost of raw materials which are intermediate goods may be included in national income accounting which brings about double counting. This will affect the final figure for national income especially where the expenditure approach is used. There are services that we do for ourselves and others that we do not actually receive any payments for. These services are therefore excluded in national income accounting and therefore affect the accuracy of the figure for national income. Payments made for replacement of worn out parts may not be considered and hence excluded from national income accounting. In inventory valuation, different methods may be used which yield diverse results resulting in different values of national income. Change in the market prices of final good and services resulting from changes in the value of money will cause a change in the national income even if the real output has not changed. The conclusions that will thus be derived from the figure of national income obtained will be erroneous.

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