# MEANING OF NATIONAL INCOME ACCOUNTING

MEANING OF NATIONAL INCOME ACCOUNTING

National income accounting may be defined as the way or means of computing or determining the money value of the total income earned in a given country over a period of time usually a year.

Explain the meaning of different national income components

Discuss different ways of measuring national income and their associated problems

Explain the shortcomings of currently used national income concepts

Discuss the recent changes in the structure of Nigerian National Income

The total income earned in a given country refers to the combinati

on of income of individuals, business organizations and the government. As individuals and corporate bodies keep records of accounts, so do the governments of various countries. A proper accounting system will reveal the standard of the economic life of a nation and these calculations give direction to economic progress of such nations

### MAJOR NATIONAL INCOME CONCEPTS OR COMPONENTS

1. Gross domestic product (GDP): Gross domestic product (GDP) may be defined as the total money value of all the goods and services produced in a country at a particular period of time but excluding net income from abroad. In calculating the GDP, emphasis is on earnings from citizens and foreign investments within the country.

Earnings of citizens and their investments abroad are excluded from GDP. GDP is used to measure the rate of growth of the economy

• Gross national product (GNP): Gross national product (GNP) may be defined as the total money value of all the goods and services produced in a country in a year plus the net income from abroad

GNP takes care of the total money value of all the goods and services produced by the citizens of a give country. It excludes the contributions of foreigner to the GDP and includes the earning of the citizens of a given country residing abroad. Mathematically, GNP = GDP + Net income from abroad

• Net national product (NNP): Net national product (NNP) may be defined as the money value of the total volume of production; i.e the gross product after allowance has been made for depreciation. In other words, the net national product is the gross national product less the estimated amount of depreciation of capital consumed during the year. Mathematically, NNP = GNP – Depreciation
• National income (IN): National income (NI) may be defined as the money value of the total volume of goods and services produced or the total income earned in a given country over a period of time, usually a year. National income is also the total of all the income obtained from economic activities during a specific period, usually one year, after allowance has been made for capital consumption.
• Personal income: Personal income may be defined as the income or amount of money received by individuals or households over a given period of time.
• Per capita income: Per capita income, also called income per capital, may be defined as the average income of the individual in a given period of time, usually a year. Per capita income can be obtained by dividing the national income by the population of the country in that year.

For example, per capita income for the year 1995

Per capita income =   National income for 1995

Population for 1995

Per capita income serves as an economic indicator of the level of standard of living and development.

• Real income: Real income may be defined as money in terms of goods and services it will buy. Real income is the national income expressed in terms of general level of prices.
• Disposable income: Disposable income may be defined as the income or amount of money that is left to an individual or household for spending and savings after the deduction of personal income taxes.

When taxes are deducted from an individual’s personal income, what is left is disposable income, which can be spent or saved by the individual or household concerned.

## FACTORS THAT DETERMINE THE NATIONAL INCOME OF A COUNTRY

1. Availability of natural resources: A country with abundance of natural resources will experience increase in national income than a country with little or no natural resources.
1. Level of technology: A higher technological development will improve or increase a national income.
• Industrial development: Industrialization also influences national income. The presence of industries or increased industrial activities can contribute positively to national income.
• Working population: A country with a high working population is likely to increase national income than a country with a low working population
• Economic situation: The economic situation of a country can influence the national income. While economic stability promotes or increases national income, economic instability decreases it.
• Nature of factors of production: The availability of the factors of production such as capital, labour, land and entrepreneur will enhance the national income of a country.
• Political situation: Political stability in any country can contribute positively to national income while political instability reduces it.

## METHODS OF MEASURING NATIONAL INCOME OF A COUNTRY

1. Income method: This is obtained by adding incomes received by all the factors of production. The incomes to be added include workers’ earnings (wages and salary), profit from entrepreneurs, rents on land, interest from capital, etc.

However, in order to avoid double counting, transfer of payments such as payment to old people, beggars, etc are not included. They are part of people’s incomes which are already counted. The income which is included must be that which arises from the production of goods and services. There must be something given out in return for a payment.

• Output method: This method measures the total money value of all goods and services produced in the country in a year. In order to avoid double counting, the figures are collected on the basis of value added.

Value added is defined as the value of output, less cost of input. In this method, national income is measured by adding together the value of enterprises which include individuals, firms and the government. Output method is also called net product or added value method.

• Expenditure method: The expenditure approach calculates the total amount spent on consumption and investment purposes during the year. In other words, it measures the total expenditure on currently produced final goods and services by individuals or households, firms and government plus net export. Transfer payment such as payments paid to retired workers, gift to beggars, etc are excluded.

## Formula for calculating national income using expenditure approach or method

N.I = C + I + G + X- M = Subsidies – Taxes – Depreciation

Where

N.I             =              National income

C               =              Private consumption expenditure

I                =              Private investment expenditure

G               =              Government expenditure on consumption and investment

X               =              Exports

M              =              Imports

Worked Example

The following is the trading account for Nigeria
in the year 1978 (in millions)

• Citizens’ private expenditure =N35.0m
• Government expenditure on goods and services = N15.6m
• Various stocks at home = N11 ,8m
• Exports income from abroad = N13.5m
• Imports income paid abroad N10.4m
• Taxes on expenditure =N7.0m
• Capital consumption=N 5. 8m
• General subsidies=N1.3m
From the information given above, (i)calculate the national income for Nigeria for the year 1978.

Solution

Expenditure                                                                                       (Nm)

1. Citizens’ private expenditure                                       =          35.0
2. Government expenditure on goods and services         =          15.6
3. Stocks at home                                                             =          11.8
4. Exports income                                                                        =          13.5
5. General subsidies                                                                     =          1.3

=          77.2

Less

1. Import’s income                                                                      =          10.4
2. Taxes                                                                                       =          7.0
3. Capital consumption                                                   =          5.8

23.2

National income                                              =          77.2m – N23.2 =         N54.0m

Alternative method using the formula:

N.I = C + I + G + (X-M) + subsidies – Taxes – Depreciation (or capital consumption).

N.I = N35.0 + 11.8 + 15.6 + (13.5 – 10.4) + 1.3 – 7.0 -5.8 = N54.0m

National income    =    54.0m

### REASONS FOR MEASURING NATIONAL INCOME

Countries measure their national incomes for various reasons, which include:

1. It shows the standard of living: National income gives an indication of the standard of living of the country through the measure of capita income.
2. It determines the growth rate of the economy: National income helps the country to determine the growth rate of the economy.
• Contribution to international organization: The national income figure determines the country’s contribution to international organizations.
• For comparing standard of Using with other countries: The per capita income which is obtained from the national income estimate is used to compare the standard of living of a county with that of other countries
• For economic policies and planning: The national income estimate is vital for economic policy and planning
• It gives pattern m expenditure of households: The national income data give an idea of the pattern of expenditure of households.
• Performance of the various sectors of the economy: Measured through the output approach, it enables the country to know the performance of the various sectors of economy.

## PROBLEMS OF COMPUTING NATIONAL INCOME

The problems that can be encountered in the measurement and compilation of national income in Nigeria include:

1. Insufficient technical experts: The technical expertise, which is an essential element for collecting and analyzing data, is insufficient.
2. Problem of double counting: Some goods can be counted twice and this gives false national income estimates.
3. Subsistence production: The predominance in the Nigerian economy of subsistence production, e.g. farming, tailoring and carpentry make estimation difficult
4. Problems of inflation: The national income figures can be over-or underestimated as a result of inflation or deflation.
• Inability to quantify some services: Some services are not easily quantified, thereby affecting the national income estimates, e.g. housewives’ services.

• Difficulties in estimating net valuation: the value of net income from abroad. This is because many individuals may be involved, hence making accurate assessment impossible.
• Improper valuation of depreciation: National income estimates will be affected by the valuation of depreciation on capital stock.
• Ignorance and illiteracy: Illiteracy and ignorance gives incomplete and false estimates for national income accounting
• Incomplete information: Income returns are inaccurate and incomplete
• Illegal transactions: Certain illegal transactions like drug peddling and smuggling make computation of national income very difficult.

## USES OF NATIONAL IN COME

The uses or importance of national income data or figures include:

1. Economic planning: National income provides the basic and comprehensive data on the contribution of various sectors of the economy to national output.
2. Influences foreign investors: It attracts foreign investment to a country, based on the level of its national income, as investors usually seek countries with rich or fast growing markets.
• Assessment of economic performance: The national income statistics are used in assessing the performance of the economy, in order to know the effectiveness or utilization of the productive resources
• Measurement of standard of income: It shows the general level and prosperity of the people over a given period of time, usually a year.
• Redistribution of income: It enables governments to design policies towards redistributing national income and the allocation of resources and revenue among sectors within the nation.
• Index for classification: It is used for classifying nations into developed nations and the developing ones in respect of their standard of living.

• Estimation of assets and liabilities: It is also used to estimate the liabilities and assets of a nation.
• Contribution of a nation into international organizations: It equally determines the level of contribution of a nation into international organizations as countries with more per capita income are expected to contribute more than the poor ones
• For future forecast: Tire national income data are used to forecast future rate of economic growth and development.
1. Basis of supply of technical aids to needy countries: It can also be used as the basis of supply of technical aid and assistance to the needy nations. International organizations tend to give more technical assistance to poorer nations and this is usually identified by comparing the per capita income of nations.

#### LIMITATIONS OF THE USEFULNESS OF NATIONAL INCOME STATISTICS

1. Differences in method of computation: The use of different methods of computation of national income by different countries makes it difficult to have a common basis for comparing nations.
2. Differences in structure of production: Where subsistence production exists, output is more likely to be grossly under-estimated than a country with a market economy.

• Does not reveal income distribution: National income estimate does not indicate whether income is widely spread or concentrated in a few individuals.
• Changes in population: The size of national income may not in itself be a true measure of economic welfare because of changes in population.
• Differences in the internal value of money: The differences in the internal value of money make it difficult to compare the standard of living among nations.
• Differences in priorities: Different countries have different priorities in terms of expenditure on output and this makes it difficult to compare nations in terms of standard of living.

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• Changes in the value of money: This makes it difficult to compare national income between years and between nations.
• Differences in national needs: Differences in the needs of nations make it difficult for national income comparison.

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