National Income: Concept, Measurement, National Income and Social Welfare

Table of Contents

It is the total monetary value of all products (goods and services), a nation or country produces within a specified period of time, usually a year. This monetary value is represented by profits, wages, and rents among others received by the Nation’s residents (Parkin et al 2000).

This income represents a country’s economic activities within its boundaries or with other countries. All the products resulting from the economic activities by residents within a country as well as the nationals of that country, all amounts to the country’s National Income. In other words, it’s the measure of wealth a Nation has (Mankiw A, 2000).

Dawes 2005 noted that National Income is in a circular flow; i.e. from aggregate demand to aggregate supply to income and back to aggregate demand. An increase in demand results in a rise in supply or prices hence income increasing, which in turn creates more demand. This results in the continuous flow of causation. National Income is high when injections increases and leakages decrease. Injections are things like government expenditure, exports, and investments while leakages comprise imports, savings, and taxation.

Concepts of National Income

There are several concepts that are used to refer to National Income. Among them are; Gross Domestic Product (GDP), which involves the value of goods and services a country produces within its geographical boundaries, regardless of the nationalities of the residents, in a specified period of time, usually a year. It includes the products of non-national in the country (outflows) and excludes the value produced by nationals of that country abroad (inflows). It also involves the exports of the country. The difference between Inflows and Outflows is referred to as Net income from abroad (Mankiw A, 2000).

Gross National Product (GNP) is another concept of the National Income of a country. This involves the total value of products (goods and services) produced by the nationals of a certain country over a certain period of time (one year). The Nationals may be based within the country or in other countries. Therefore the relationship between GDP and GNP can be represented as follows: GNP = GDP + Inflows – outflows

GNP = GDP + Net income from abroad

Net National Income is also another concept of National Income (Griffiths 1998).

Measurement of National Income

If a commodity has been produced, there is a certain value that purchasers spent on it as well as a service that has been provided. The same value is received by various factors of production that were involved in the production process. This gives rise to the three basic approaches used in measuring National Income (Mankiw 2000).

The Expenditure Method

The total monetary expenses incurred during the process of producing goods and services are taken to give the figure of National Income. These expenditures include; Private consumption by individuals (C) i.e. Individual consumption, expenditures incurred by private investors as well as replacement of old machinery i.e. gross domestic private investment expenditure (I). Government expenditure on goods and services per year (G) and the Net foreign expenditure (N) i.e. the difference between imports and exports are also included (Mankiw 2000).

The summation of all the above expenditures gives the GNP or National Income at current prices in the market since the expenses are incurred at market prices. These can be summarized in the equation below.

GNP = C + I + G + N.

The Income Method

In this method, all incomes received or paid for production activities are quantified. They include Incomes such as wages, salaries, undistributed corporate profits, interest incomes, dividends, direct taxes from an individual, net income from abroad, and rental income are summed up. This summation yields to GNP at factor cost. GDP at factor cost include the summation, excluding income from abroad (Mankiw A, 2000)

GNP at market prices has some overstatements due to direct taxes but government subsidies understate it. This GNP at factor costs gives a good estimate of National Income (Griffiths 1998).

Value-Added Approach (Output)

Mankiw 2000 argued that the value of services and goods produced at the current market price is considered in this approach. Even though it’s difficult to differentiate between a final good and an intermediate product. To avoid this duplication, the value of the intermediate product should be subtracted from the total output value in each sector or industry in the economy. This value which is the difference between the final value and the intermediate value is referred to as the Value Added.

The figures obtained in this method usually provide the best estimation of National Income as it gives the exact relative contribution to the economy (Parkin et al 2000). The main advantage of this approach over the others is that it eliminates the double-counting error, although it has a limitation in that it is difficult to estimate value-added in some services like public health and education

All the above methods of calculating a country’s national income give the same result. This is as a result of a balance between the total expenditures incurred during the production of goods and services, the total income received by the producers, and the total worth of the goods and services produced (Parkin et al 2000).

Value Added = Income = Expenditure.

Double counting

Practically, a measurement error occurs in the process of measuring the actual totals, which in most cases it’s a double-counting error (Parkin et al 2000).

Economists describe double counting as an error that occurs during the process of computing the total output of an enterprise, without Lessing the costs incurred in purchasing the inputs from other enterprises. For example, a finished good may be bought as a raw material or an input in another industry, therefore determining the value of that good is very difficult (Perloff 2004).

National income and social welfare

According to Griffiths 1998, there has been a continued debate over the years; on whether an economic measure such as National Income really determines an individual’s social well-being. Many traditional economists had the assumption that people’s income levels primarily determined an individual’s happiness and well-being (Colander 2004).

The Gross Domestic Product of a country determines a family’s per-capita income, which in turn determines its standards of living. Therefore GDP of a country in relation to its population size is an indicator of a certain population’s welfare, but not really the best indicator of happiness in individuals. National Incomes may be helpful in assisting the government in planning, or in comparing the living standards between two or more countries, as being helpful as it can act as an indicator of a country in need of assistance economic wise(O’Sullivan 2006).

A country’s income will determine the average wage of its residents. Wages are usually higher in countries with relatively larger national income, and this has a direct influence on people’s Expenditure patterns. Therefore individuals with higher wages tend to be happier, as they can afford almost anything they need in life (Griffiths 1998).

Since National Income is measured in the current market prices, changes in the prices can alter people’s consumption patterns (Colander 2004). For instance, when an economy is faced with inflation in the prices of commodities, people will tend to consume less than when the prices are stable.

However, National Income is not the best measure of social welfare, as it does not show how income is distributed in the economy. A country might have a big National Income figure but its population might be poor hence unhappy due to inequitable distribution of resources.

Increased National Income can be due to increased working hours or higher prices of commodities in the market and all these don’t bring happiness or people’s social well-being. The figures of National income also don’t consider the harm to the environment resulting from production activities, which is a concern of people’s welfare.

Figures of National Income do not include the value of unpaid labor especially the work done by women in the households (Mankiw 2000)

BraSchiller 2005 noted that GDP as a measure of national income is not a sufficient measure of individuals’ welfare. For instance GDP increases when expenditures on cleaning the environment increase, but the social welfare goes down since this could lead to illnesses as a result of pollution. Other economic indicators of welfare and happiness are outlined below

Household income (Indisposable personal income) is highly influenced by the per-capita of a certain population (Begg et al 2000).

Per capita = GDP

Population of a certain economy

Government taxation, private savings, political factors, investments, and economic status in a country are among other useful indicators of social welfare and happiness in a given population. For instance, the current global economic recession is highly affecting people’s welfare as well as their happiness. (Williamson 2000)

References

Begg D, Fischer S. & Dornbusch R, 2000, Economics, (7th Edition), McGraw Hill, New York.

BraSchiller S, 2005, Essentials of Economics (5th edition), McGraw-Hill, New York.

Colander M, 2004, Macroeconomics (5th edition), McGraw-Hill, New York.

Dawes HN, 2005, Basic principles of economics, Addison Wesley, Boston.

Griffiths H, 1998, Intermediate Microeconomics Theory & Applications, Longman, Cape Town.

Mankiw A, 2000, Macroeconomics (4th edition), Worth Publishers, New York.

O’Sullivan P, 2006, Economics Principles & Tools (4th edition), Prentice Hall, New York.

Parkin et al, 2000, Macroeconomics, Addison Wesley, Boston.

Perloff GF, 2004, Microeconomics (3rd edition), Addison Wesley, Boston.

Williamson, DS 2000, How Do We Feel? Economic Boom and Happiness (7th edition), Oxford, London.

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