National Income Accounting: Part I
Now I will look at some important concepts in Unit 12 Social Accounting and International Trade. The topic is National Income Accounting. Before looking at these concepts, I will state the specific objectives for the topic. The candidate should be able to:
* define National Income and its variants
* show how National Income may be measured
* discuss National Income as a measure of the standard of living of a community. Objective one will be covered this week; the other two objectives will be covered in next week’s lesson.
CONSIDER THESE QUESTIONS
How well is the Guyanese economy performing today? Is it operating at full capacity or are some of the country’s productive resources idle? Are the country’s productive capacity and actual production growing? If so, is production growing at a faster rate than the population? These are the kinds of questions that economic policy makers are constantly asking themselves. In order for policy makers to formulate sound economic policies for maintaining the nation’s economic health, it is necessary to have accurate measures of the economy’s performance.
National Income Accounting refers to the accounting records that measure the national economy’s performance. National Income looks at a country’s total income. There are a number of variants/forms of national income. I will now look at these variants of a country’s Total Income (National Income).
GROSS DOMESTIC PRODUCT (GDP)
GDP is the total money value of the final goods and services produced in a country during a one-year period. It is important to note that the GDP figure does not include goods and services produced by firms abroad that are owned by local individuals or the government. GDP therefore takes into consideration what is produced in the country itself with the resources of the country.
GROSS NATIONAL PRODUCT (GNP)
This is the broadest measure of the economy’s ‘health’. It refers to the total money value of all final goods and services produced by a country during a one-year period. GNP takes into account not only what is produced locally, but also what is produced by firms abroad that are owned by local individuals and the government.
NET NATIONAL PRODUCT (NNP)
This refers to the total money value of all goods and services produced by a country during a one-year period after depreciation is deducted. Depreciation refers to the loss of value because of wear and tear to consumer durables and producer goods. GNP and GDP do not take depreciation into account. Therefore, the difference between GNP and NNP (NI) is depreciation.
NATIONAL INCOME (NI)
This is a measure of the total income earned by everyone in the economy. It includes those who use their own labour to earn an income as well as those who make money through the ownership of the other factors of production. National Income is equal to NNP minus indirect business taxes such as excise duties and custom duties etc.
DISPOSAL INCOME (DI)
Although this is the smallest measure of income it is an important indicator of the economy’s ‘health’, because it measures the actual amount of money people have to spend. DI is also known as personal disposable income. It is the amount of money that individuals have available for spending after personal taxes are paid. These taxes are subtracted from personal income. DI may also be regarded as the income available to an individual for immediate purchase of goods and services and for savings. For the most part, DI is equal to the amount of money received from an employer after taxes and other deductions such as social security. Individuals have a choice as to how to allocate their disposal income. Most of disposal income is spent for personal consumption, and that portion not spent for consumption is called personal savings.
PERSONAL INCOME (PI)
This is the total amount of income going to households/individuals before taxes are subtracted. PI can be derived from NI through a two-step process. Firstly, corporate income taxes, profits that businesses put back into their businesses to expand and social security contributions made by employers are all subtracted from NI. These are subtracted because they represent money that is not available for businesses to spend. Secondly, transfer payments (i.e. welfare and other supplementary payments such as unemployment compensation) are added to NI. These transfer payments add to an individual’s income. However, they are not in exchange for any current productive activity that has been done by an individual. The resulting total is the final measure of personal income.
Next week’s lesson will look at how National Income can be measured and the uses of National Income data.
Now you can check your understanding of this week’s lesson by explaining the following to your friend:
(1) the term National Income Accounting
(2) three of the six forms of a country’s National Income
(3) (i) the difference between GNP and NNP
(ii) the difference between personal income and disposal income.
National income accounting (Part 2)
HELLO EVERYONE! Last week’s lesson looked at the terms ‘national income accounting’ and ‘national income’, and then discussed the variants or forms of
This week’s lesson will outline the methods of measuring national income and the uses and limitations of national income statistics.
THE MEASUREMENTS OF NATIONAL INCOME
In order to assess how fast an economy has grown, we must have a means of measuring the value of the nation’s output. The measure of national income that we use to do this is known as Gross Domestic Product (GDP). Last week, GDP was defined as the total money value of the final goods and services produced in a country during a one-year period. Remember that this figure does not include goods and services produced by firms abroad that are owned by local individuals or the government. It takes into consideration therefore only what is produced in the country with the resources of the country.
There are THREE methods of measuring GDP. All the three methods should result in the same GDP figure:
* The first method of measuring GDP is to add up the value of all goods and services produced in the country. This is known as the Product/Output Method.
* The second method of measuring GDP is to add up all the incomes in the form of wages and salaries, profit, rent, and interest. This is known as the Incomes Method.
* The third method focuses on the expenditure necessary to purchase the nations production. This is called the Expenditure Method.
Since the value of what is sold is also the value of what is produced and these must be equal to the value of the expenditure, all the three methods must yield the same result, i.e.,
NATIONAL PRODUCT/OUTPUT = NATIONAL INCOME = NATIONAL EXPENDITURE. In reality, however, the figures may differ slightly and the difference is made up by use of an accounting procedure known as the margins of error or statistical discrepancy.
Before we look at the uses and limitations of national income statistics, let us consider the factors that influence national income.
INCOME OF A COUNTRY
The major factor affecting national income of a country is the degree of economic growth. This in turn is influenced by the following:
1. The availability of natural resources and how effectively these natural resources are used by the country The greater the availability of natural resources, and the more effectively they are used, the greater will be the country’s economic growth and therefore the greater will be its national income. In Jamaica, our natural resources include bauxite, limestone and sand.
2. The quality of the country’s labour force also affects economic growth and ultimately its national income In considering the quality of labour, factors such as size, its health and the skills it has are of utmost importance.
3. The degree of industrial development of the country’s industries The more equipped and technically advanced they are, the greater will be the country’s economic growth and by virtue of its economic growth, its national income.
4. Economic activity should be spread over a wide range of industries in order to achieve high levels of national income.
5. Political stability is important to economic growth If there is political unrest, investment will be adversely affected and economic objectives will not be achieved.
USE OF INCOME STATISTICS
Now, having compiled the necessary national income statistics, what does a country do with them? We will now look at this and then move on to the limitations in the use of these statistics.
THE USES AND LIMITATIONS OF NATIONAL INCOME STATISTICS
1. The statistics allow us to compare output of one country with another.
2. The figures can be used to compare economic growth of countries at a particular time and over a period of time.
3. The statistics serve as a tool or instrument of economic planning, i.e., the statistics help government to determine how to plan for a country and these plans are included in their budget.
4. One of the most important uses of these statistics is its use in comparing the standard of living of one country with another, i.e., an increase in the National Income statistics usually an increase in standard of living.
However there are a number of limitations in using these statistics as an indicator of standard of living because of:
(a) Problems of measuring national output where there are instances of unrecorded items. This occurs where:
I.There are non-marketed items e.g. babysitting
II. Where underground economies exist.
(b) Total GDP/GNP figures ignore the distribution of income.
(c) Problems in using National Income statistics to measure welfare since:
I. Production does not equal consumption
II. There may be high human costs of production
III. Externalities are ignored. There are costs and benefits to parties external to the production or consumption of a good or service.
(d) National income statistics is recorded in money terms. The value of money is constantly changing and therefore inflation can cause it incorrectly to appear as if a country’s national income is increasing. Deflation would have the opposite effect. What is important therefore is the REAL increase in the national income and to arrive at this, allowances must be made for changes in the value of money.