This National Income Accounting (Statistics) lesson notes is for students of the class of upper sixth.
This topic basically is concerned with how national income which is one of the main macro-economic aggregates is measured and a few related issues.
What is national income?
National Income (N.I) refers to the total money value of the goods and services produced by a country’s resources over a given period of usually a year.
Whereas, National income accounting refers to a government bookkeeping system that measures a country’s economic activity—offering insight into how an economy is performing. Such a system will include total revenues by domestic corporations, wages paid, and sales and income tax data for companies.
National Income accounting identity can be represented as follows;
National Income ≡ National Output ≡ National Expenditure
From the above, we have to understand that calculating N.I comes back to either taking the sum of incomes or sum of outputs or expenditures with a few adjustments along the way in each situation.
In short, a good mastery of this topic should lead us to be able to;
- Calculate N.I by the three traditional methods and master the problems related to each method of calculation as well as the general problems involved.
- Discuss the importance of N.I statistics as well as the limitations.
- Distinguish between real and money National Income and how to estimate each of them.
- Differentiate between N.I and Social Welfare or the standard of living in a country or between countries.
- Explain how the concepts of Gross National Product (GNP), Net National Product (NNP), National Product or National Income, personal income, disposable income, etc can be derived from Gross Domestic Product (GDP).
Calculating National Income
Using the Expenditure Method
The expenditure method is a system for calculating gross domestic product (GDP) that combines consumption, investment, government spending, and net exports. It is the most common way to estimate GDP. It says everything that the private sector, including consumers and private firms, and government spend within the borders of a particular country, must add up to the total value of all finished goods and services produced over a certain period of time. This method produces nominal GDP, which must then be adjusted for inflation to result in the real GDP.
TDEMP + X = TFEMP – M = GDPMP – T + S = GDPfc + NPIA = GNPfc – Dep = NNPfc or N.I
TDE = Total domestic expenditure which is made of consumers expenditure(C);
General government final expenditure (G) and investment on gross domestic capital formation including changes in stocks and work in progress (I).
Therefore, it follows that,
TDE = C + I + G
NB: It should be noted that investment is defined to include gross domestic capital formation and changes in stocks.
X = Exports of goods and services
TFE = Total final expenditure
M = Imports of goods and services
GDPmp = Gross Domestic Product at market prices
T = Expenditure taxes or indirect taxes
S = Subsidies
GDPfc = Gross domestic product at factor cost
NPIA = Net property income abroad or the difference between income received from abroad and income paid abroad.
Dep or C.C = Depreciation or Capital consumption
NNPfc = Net national product at factor cost or N.I
NB: The operations must not be strictly followed this order because addition and subtraction are commutative. It suffices to know that each operation has significance. For instance, in so far as adjustments are not made for taxes and subsidies, all values remain at the market price.
The Gross Domestic Product at market price is given as;
GDPmp = TDEmp + X – M