Meaning of national income

It should be noted that individuals engage in economic activities and keep records of their business transactions. Also, government engages in economic activities and keeps record of their transactions. Such record keeping by the government leads to the formulation of national income figures. Hence, national income is the summary of a country’s economic performance by measuring the aggregate income and output of goods and services within a specified period of time usually one year.

It is therefore defined as the sum of the net earnings of factors employed in the production of economic goods within a specified country usually one year. It can also be defined as the total money value of goods and services produced in a country within a period of time usually one year. In other word, national income is seen as the sum of total received by the factors of production within a period of time usually one year. From the definition above, the national income can be viewed as

• The total output of goods and services produced in a country within a specified period of time usually one year.
• It can be regarded as the total income within a given period of time usually one year.
• It is also seen as the total expenditure in the economy within a given period of time usually one year.

It should be noted that national income differs from government income. While national income is the value of economic activities in the country within a specified period of time usually one year, government income is the revenue raised by the government through taxation and borrowing or other sources. It should be noted that government itself contributes to the national income of a country. The national income of a country like Nigeria comprises of the following items:

• All products of the extraction or primary industries of the country
• All the goods produced by the manufacturing and construction industries of Nigeria.
• The money value of all services e.g services of doctors, teachers, engineers, lawyers, bankers and so on.
• The total rent paid for dwelling houses and the amount which should have been paid for owner occupied houses.
• The net income from abroad ie the difference between the income from abroad and payment made to other countries.

Major concepts of National Income

The following are some of the major concepts of National income

• Gross Domestic Product (G.D.P)
• Gross National Product (G.N.P)
• Net National Product (NNP)
• National Income (N.I)
• Personal Income (P.I)
• Disposable Income (Y^d)
• Per Capita Income

Gross Domestic Product

This refers to the total value or monetary value of all the final goods produced within a country during a given period of time usually a year. It should be noted that goods and services produced in the country but which are sold to other countries (i.e exports) are included in the compilation of gross domestic product while those ones purchased from other countries that is imports are excluded. Therefore, GDP is symbolically written thus, G.D.P = C+ I+ G+(X- M)

Where,

C = Consumption expenditure

I= Investment

G = Government

X = Exports

M = Imports

However, it should be noted that the G.D.P excludes those goods and services produced by the nationals abroad.

Gross National Product (GNP)

This is the total monetary value of all final goods and services produced in a country including net revenue or income realized from abroad. Therefore, GNP is written symbolically thus;

GNP = GDP + Net factor income from abroad

This implies that GNBP measures all goods and services produced by Nationals or citizens of a country within and outside the geographical boundary of that country.

The net factor income from abroad is the difference between the income received by the citizens of that country all over the world minus the income received by foreigners residing in that country. Hence, when the GNP is greater than GDP, then the net factor income from abroad will be positive. However, when the GNP is lesser than the GDP, the net factor income from abroad will be negative. In addition, when the GNP = GDP, the estimate value for the net factor income from abroad is zero.

Net National Product:

This is the total monetary value of all final goods and services produced in a country excluding depreciation (or capital consumption allowance). This can therefore, be written symbolically thus:

NNP = GNP – Depreciation

It is pertinent to note that NNP measures the total value of new goods and services available to a country in a given period of time usually a year.
National income:
In general term, National income is any measure of aggregate income or output of the country. Hence, national income is the summation of all incomes earned by all the factors of production in the economy during a specified period of time usually a year. To calculate the national income, we must deduct indirect business taxes from net national product and then add subsidies to it. Then, N.I can be written symbolically thus:

NI = NNP – IBT +SS

Where,

NNP = Net national product

IBT = Indirect Business taxes

SS= Subsidies

This will give us the value of output at factor cost rather than market prices.

Personal Income:

This is the total amount of money received by individuals or household in a country over a given period of time, usually one year. It should be noted that personal income is calculated by the addition to the national income with the income received by the household but not earned ie transfer payments which includes gifts, bursary awards, and scholarship awards and so on. You then subtract income earned but not received e.g. social insurance contribution (pension), company taxes or individual taxes and undistributed projects. Therefore personal income can be written symbolically thus:

P.I = N.I – (SIC +CT + UP) +TP

Where,

P.I = Personal Income

SIC = Social insurance contribution

CT = Company Taxes

UP= Undistributed product

TP = Transfer payments

N.i= National Income
Disposable Income:
This is the amount of money left to an individual or household for spending or saving after the deduction of personal income taxes. It is written symbolically thus;

Y^d = P.I – PIT

Where

Y^d  = Disposable income

P.I = Personal Income

PIT = Personal Income taxes

Per capita Income:

This is the gross national product divided by the total population of a country. It is written symbolically thus;

Per capita income =   GNP

Total population

This is an economic indicator used to measure the level of the standard of living of the population of a country.

Methods of computing or Estimating N.I of a country

Basically, there are 3 methods or approaches to the computation of national income. They are;

• Output or product method  / approach
• Income method / approach
• Expenditure method / approach

Output or product method or approach

This measures the total monetary value of all final goods and services produced in a country during a period of time usually a year. In order to avoid double counting, it is advisable that the figures are collected on the basis of value added i.e we should ask ourselves a simple question, what is value added? Value added is the value of output minus the cost of all output.

Problems or limitations of output or product method

The following are some of the problems or limitations of output approach; they are:

• It is difficult to compute or estimate the value of goods and services consumed of produced by the producer himself
• It is difficult to place money value on certain government services such as education, health, defense etc.
• The output of some people such as housewives cannot be measured in monetary terms.
• It is difficult to compute value on services which a person renders to himself or herself

Income method or approach

This is obtained by adding incomes of all the factors of production during a period of time usually a year to avoid double counting, transferred payments are not included because these are incomes received but not earned or worked for. This method therefore sums up the salaries or wages, rent, interest and profit to arrive at the net capital estimate.

Limitations or problems of the income method or approach

• All incomes received from abroad are to be added while those paid to foreigners have to be subtracted.
• Many houses are occupied by their owners and it may be difficult, if not impossible to fix the correct rent.
• Some firms do not always pay out all their profit as dividends to shareholders; Instead they re-invest the profit into the business.
• The incomes of many self-employed persons are not known.

Expenditure method or approach

This measures the sum of expenditure of final goods and services by individuals, firms and government. To avoid double counting, only expenditures on final goods should be taken into consideration while expenditure on semi-finished goods should be taken into consideration.

Limitations or problems of expenditure approach

• Many people do not keep account of their expenditure
• Problem of making provision for indirect taxes should be subtracted while subsidies are added.
• Problem of having the value of export and subtracting the value of import.
• Problem of unsold output must be accounted for if the estimate of national income is to be accurate.

Factors that determines the size of the national income

The following are some of the factors influencing the size of national income. These include;

• The stock of capital equipment in terms of machinery, industrial equipment needed to boost production of goods and services.

• The level of technological development: The use of modern techniques in the production process will save time and reduce cost. This increases efficiency in the economy and also increases the national income of a country.

• The stock of national income resource(s) equipment: When the country has abundant natural resources and it is properly utilized, it will lead to increase in the national income of the country.

• The stock of foreign private investment: Loans and aids. This will also lead to an increase in national income.

• Quality of human resources and their structure will also influence the size of the national income.

• The level of political stability:

• When there is stable government in a country, this will promote activities economically and also attract foreign investment hence, this will result in a rise of N.I

Uses of National Income

The following are some of the uses of national income

• To know a country’s economic progress overtime
• To determine the standard of living of people in a country.
• To compare the standard of living of people among countries in the world
• To know the production pattern in the country
• To ascertain consumption levels and consumer confidence
• It helps to influence foreign aids and assistance
• To assist in development planning
• To help in the allocation of resources in the country
• It helps in the re-distribution of income

Explanation of points:

• To know a country’s economic progress over time: The national income estimate helps the country know whether it is progressing economically or not during a period of time by comparing the national income figure over a period of time usually one year.

• To know the standard of living of the people in a country: The national income figures are used to indicate the overall standard of living of people in the country. The GNP is divided by the total population of the country to give the per capita income per head. It is important to note at this juncture, that the higher the standard of living, the lower the per capita income, the lower the standard of living, provided the incomes are evenly distributed.

• To compare the standard of living of people among countries in the world: The national income estimate is used to compare the standard of living of various countries. Ult is used to determine whether the country is developed, developing or underdeveloped.

• To know the production pattern of the country: The National income estimate shows the value of all the production activities of the country thus indicating the production structure of the country

• To ascertain consumption levels and consumer confidence: In the calculation of national income, consumption expenditure is derived and added to other factors to determine the national income. National income therefore helps a country gauge their consumption levels and saving habits. Consumer spending on the other hand is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. National income helps to measure this degree of confidence.

• It helps to influence foreign aids and assistance: The national income estimate helps to determine the amount of aids or assistance which rich or developing countries give to developing countries and to also determine the amount of contribution to an international economic organization, like African union, United Nations and so on.

• To assist in developmental planning: National income figures help a country know what they have done right or wrong, and helps them work towards achieving a set goal or maintaining success. For example a goal for country might be to improve per capita income by 25%. Assuming they don’t reach this goal, the national income figures can help them plan towards reaching it the following year.

Calculation of National Income by using the Output or product method or approach
To calculate or measure the national income accounting of any country using output or product method approach, this format can be used:

	List of items	Amount in $
Add income from:	Agric, forestry and fishing	XXXX
	Mining and quarrying	XXXX
	Manufacturing	XXXX
	Transport and communication	XXXX
	Building and construction	XXXX
	Banking, finance qand insurance	XXXX
	Whole sale and retail trade	XXXX
	Government services	XXXX
	Community services	XXXX
	Other services	XXXX
Less	Stock Appreciation	(XXX)
	Residual error (Statistical discrepancy)	(XXX)
	Gross Domestic product at current factor cost	AAAA
Add	Net Income from abroad	XXXX
	Gross National Product at current factor cost	AAAA
Less	Consumption of fixed capital or depreciation	(XXX)
	Net National Product (NNP) at current factor cost	AAAA

Calculation of National Income by using the income method or approach
To calculate or measure the national income of any country using income method approach, this format can be used:

	List of items	Amount
Add	Income from employment	XXXX
	Public and private sector profits	XXXX
	Net interest	XXXX
	Income from self-employment	XXXX
	Other Income	XXXX
Less	Stock appreciation	(XXX)
	Residual error	(XXX)
	Gross Domestic product at current factor cost	AAAA
Add	Net income from abroad	XXXX
	Gross National Product at current factor cost	AAAA
Less	Consumption of fixed capital or depreciation	(XXX)
	Net National Product (NNP) at current factor cost	AAAA

The formula to calculate national income using income method or approach is

National Income = GNP (W+I+R+P+TB) – D

Where

W= Wages or salaries

I= Interest

R= Rent

P = Profit

TB = Business Taxes

D= Depreciation
Calculation of National Income by using the expenditure method or approach

	List of items	Amount
Add	Private consumption expenditurE ( C )	XXXX
	Gross capital Formation / Investment  (I)	XXXX
	Government final consumption expenditure (G)	XXXX
	Net export (X-M)	XXXX
	Gross Domestic Product (GDP) at current market prices	AAAA
Add	Net income from abroad	XXXX
	Gross National Product (GNP) at current market prices	AAAA
Less	Consumption of fixed capital or depreciation	XXXX
	Net National Product (NNP) at current market prices	AAAA
Less	Net indirect taxes (ie difference between taxes (-) and subsidies (+)	XXXX
	National Income at current factor cost	AAAA

Recommended Readings

Olivier Blanchard., David R Johnson., Macroeconomics (6^th edition)

Schaum’s outline of macroeconomics (third edition)

Timothy Taylor., The instant economics: Everything you need to know about how the economy works.