Topic 1: National Income

National Income can be defined as the total value of final goods and services produced
by the nationals of a country, regardless of territorial boundary, less depreciation, over a
period of time usually a year.

National income can be measured in a number of different ways:

Gross Domestic Product (GDP) is the value of all the goods and services produced over
a period of time within a country.

Gross National Product (GNP) is GDP plus what is called ‘net property income from
abroad’

National Income is GNP minus an allowance for depreciation.

*For Additional Information Refer to Pg 120 Anderton

Calculation of National Income

There are three methods of calculating national income. They are:

• Income Method
• Output Method
• Expenditure Method

Income Method

Using the income method, we calculate the national income by adding the following
items:

• Wages and salaries

• Rent from tenants
• Interest earned from banks and dividends
• Undistributed Profits
• Income of self-employed people, e.g doctors, hawkers

Problems encountered in using this method is that there are certain types of incomes that
should not be included in the calculation of national income as there is no increase in the
production of goods and services. They are known as transfer payments. Examples of
transfer payments are pensions, social security benefits, unemployment benefits,
scholarships and allowances to housewives.
Output Method

Using the output method, we calculate the national income by adding the totals value of
goods and services from the following three sectors in the economy:

• The primary sector, which consists of agriculture, fishery and mining industries
• The secondary sector, which consists of manufacturing and construction
industries.
• The tertiary sector, which consists of service industries such as financial, retail
and tourism industries.

Expenditure method

National Income = C+I+G+(X-M)

Using the expenditure method, we calculate the national income by adding the following
give items as shown below:

• Consumer expenditure (C)

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• Gross Investment (I)

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• Government expenditure on goods and services (G)

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• Exports (X)
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 • Imports (M)
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Problems in measuring national income

• Illiteracy and inaccessibility

Some countries have a lower literacy rate than other countries. With low literacy
rate, the governments will find it difficult to compute national income date
because the people may not be able to provide the required data.
In addition, there is also the problem of inaccessibility. In some poor countries,
certain areas are so remote that the inhabitants can only be reached by foot.

• Lack of skilled labour

We need professionals like statisticians, researches, programmers, skilled

interviewers and data collection experts to implement the necessary system for the
collection of data for the computation of national income. The lack of such
professionals in developing countries makes the computation of national income
difficult.

• Provision of false information

In order to avoid paying high personal income taxes, some businessmen and self-
employed people might under-declare their earnings. Provision of false data will
cause a miscalculation of the national income.

• Arbitrary definitions

The phase ‘national income’ is very loosely and arbitrary defined. For example, a
maid and a housewife are doing the same household chores. However, the
services of a maid are included in the calculation of national income but not that
of a housewife’s because the former is paid for her services. Likewise, if a
professional painter paints his neighbour’s house, his service is included in the
calculation of national income because he gets paid for work. However, if he is
not a professional and is not paid, the same kind of work will not be included in
the calculation.