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ECON1/6: NATIONAL INCOME IN ECONOMICS

This Unit is about National Income and how it works.

NATIONAL INCOME

This is the money measure/ money value of all final goods and services produced in the country or a nation in the given period of time usually one year. National income considers the flow of output of commodities, the income and expenditures. It considers the final goods arising from the productive activities. National income can be referred to as national products.

National income is the total monetary value of all final goods and services produced in an economy out of the productive activities in a given period of time usually a year.

From this definition, we note the following;

  1. National income is measured in money terms. However, we are interested in the value of goods produced and not money itself.
  2. Only market prices of final goods and services are considered. This is intended to avoid double counting since production takes many stages before goods reach the final consumer.
  3. We measure both goods and services. Services are also measured because they also satisfaction to consumers.
  4. Income should be derived from goods and services arising out of productive activities. Therefore incomes received for no work done for example pocket money for students, pensions, unemployment benefits, bursaries, gifts from friends and organizations (transfer payments) should be excluded when estimating national income.
  5. National income figures exclude incomes from illegal activities like prostitution and gambling.
  6. National income is measured per period of time thus it is a flow variable and not a stock variable
  7. Incomes should be from transactions of a particular current period. Those arising from periods other than the current period should be excluded.

CONCEPTS USED IN NATIONAL INCOME / DEFINITIONS OF KEY WORDS

Gross domestic product (GDP). This is the total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year including the value of depreciation.

Gross national product. This is the total monetary value of all final goods and services produced by nationals living within and outside the country in a given period of time usually a year including the value of depreciation.

The relationship between GDP and GNP is such GNP=GDP+ Net factor incomes from abroad are the income of the nationals of abroad-incomes of foreigners in the country.

Net domestic product. This is the total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year excluding the value of depreciation.

NDP=GDP-depreciation or net income=gross income – depreciation. Depreciation can also be regarded as capital consumption allowance in national income.

Net national product (NNP). This is the total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year excluding the value of depreciation.

Gross Domestic Product at factor cost (GDPfc). It refers to total monetary value of all final goods and services produced within the geographical / territorial boundaries of the country by nationals and foreigners in a given period of time usually a year including the value of depreciation valued at prices of factors of production, it includes subsidies and excludes indirect taxes.

Gross National Product at market prices (GNPmp). It refers to the total monetary value of all final goods and services produced by nationals living within and outside the country in a given period of time usually a year including the value of depreciation valued at current market prices of goods and services, it includes indirect taxes and excludes subsidies.

National income at factor cost. This is the money value of all final goods and services produced in a country in a given period of time considering what is paid to the factors of production.

National income at market price. This is the money value of all final goods and services produced in the country considering the current market prices/valued at current market prices. National income at market price=national income at factor cost +indirect taxes.

NYmp =NYfc + indirect taxes- subsidies.

Personal income

This is income received by individuals or households in a given period of time. It includes income from employment, as paid labor, income from self-employment and transfer income and rental incomes but it excludes undistributed profits and other income which is not currently received.

Personal income =sum of all incomes from paid employment + incomes from self-employment +transfer income + rental income –(undistributed profits + incomes not yet received).

It’s important to note that personal income is not equal to national income because personal income includes income from non-productive activities while national income excludes such incomes.

A personal income includes transfer incomes like student’s grants and allowances, pension funds but national income excludes those transfer incomes.

Disposable incomes (Yd0)

This is income which is available to individuals or households for consumption, spending and saving. It is that income which is left to individuals and the households after personal, direct taxes and compulsory payments have been deducted.

Yd =GDP -Any part of income not paid to the households or

Yd=personal income- personal direct income + taxes +compulsory payments.

Depreciation/ capital consumption. This is the loss in the value of capital assets through wear and tear arising out of their usage in the production process over a given period of time.

Depreciation value/ Capital consumption allowance. This is the amount of money set aside by an entrepreneur to cater for the wear and tear of capital assets of a firm.

Transfer payments/ transfer income.  This refers to payments made to individuals without corresponding goods and/ or services rendered i.e. they are non-quid proquo payments.

OR

Refers to income received by an economic entity without anything given in return.

Examples of transfer payments in Uganda include;

  • Grants/ donations
  • Old age pension
  • Students pocket money/ upkeep to spouses, relatives, etc
  • Bursaries
  • Sick relief/ benefits/ allowance and other forms of relief
  • Gifts

Sources of transfer payments include:

  • This includes the local, central and foreign governments.
  • Individuals or households.
  • Institutions like business funds and Non-Government Organizations (NGOs)

Net income from abroad/ Net property income. This is the difference between property incomes earned by nationals abroad and property incomes earned by foreigners in the country.

Per capita income. This is the average income per individual in a country at a given period of time.

Real income.  It is income in terms of goods and services which a given amount of money income can buy in a given period of time. It is the purchasing power of a given amount of nominal income.

Or

This is the quantity of goods and services that one’s nominal income can buy.

 

Nominal income is the income expressed in monetary units like pound sterling, dollar etc.

Real income is determined by the following;

The price of goods and services; When the price is high real income is low and when prices are low, real income is high.

The level of nominal income; When nominal income is high real income is also high assuming other factors constant.

The level of taxation. High taxes reduce real income and low taxes lead to high real income.

The cost of living. The cost of living refers to the amount on money needed to purchase a given basket of commodities at a particular period of time. When the cost of living is high real income is low and when the cost of living is low real income is high.

Availability of goods and services. When goods and services are readily available, real income is high but when goods and services are inconvenient (hard and difficult to get) the real income is low.

The size of monetary/subsistence sector. When the subsistence sector is small and all the transmission are at the use of money, real income is low but where the subsistence sector is big and its possible for individuals to produce for their own consumption, real income is high.

ADJUSTMENTS IN NATIONAL INCOME

  1. a) From Gross to Net, subtract the value of depreciation
  2. b) From Net to Gross, add the value of depreciation
  3. a) From Domestic to National, add net income from abroad
  4. b) From National to Domestic, subtract net income from abroad
  5. a) From factor cost to market price, add indirect taxes and subtract subsidies
  6. b) From market price to factor cost, add subsidies add subtract indirect taxes.

FACTORS WHICH DETERMINE A COUNTRY’S LEVEL OF NATIONAL INCOME

  1. The government policy of taxation and subsidization. The offering of subsidies to producers by the government reduces the cost of production and this encourages investors to produce more goods and services which creates high national income. However, heavy taxation discourages investors because it increases the cost of production which leads to low levels of output of goods and services leading to low national income.
  1. Rate of capital inflow and outflow. High rate of capital inflow in form of incomes from nationals abroad, donations and grants increases funds available in the country for investment resulting into higher levels of output produced hence high level of national income. However, high rate of capital outflow in form of income and profit repatriation reduces the funds available for investment thereby limiting production of goods and services hence low level of national income.
  1. Level of entrepreneurial skills/ managerial skills/ the entrepreneurial ability. High managerial skills lead to better organization of factors of production which leads to production of more goods and services which creates high national income. However, limited entrepreneurial skills result into poor organization of factors of production leading to low output of goods and services hence low national income.
  1. Availability and level of exploitation of natural resources. Natural resources refer to all gifts of nature. They include minerals, water bodies, soil, etc. High level of resource exploitation results in high volume of goods and services produced leading to high national income while low levels of natural resource exploitation result in low output of goods and services leading to low national income.
  1. The level of technology used in production. Use of advanced and modern technology in form of capital intensive techniques of production brings about massive production of goods and services which creates high national income. However, use of poor technology limits exploitation of resources which results into low output levels thereby creating low national income.
  1. Political climate/ atmosphere.A favourable political atmosphere characterised by peace and stability gives confidence to investors thus making it possible to produce more goods and services which creates high national income. However, political instability creates fear of loss of life and property among investors leading to low output of goods and services hence low national income.
  1. Level of monetisation of the economy/ the size of the subsistence sector. A big monetary creates greater volume of marketed output and this brings about high national income. However, a large subsistence sector creates low volume of marketed output and this brings about lo national income.
  1. The level of accountability/rate of corruption. Low level of corruption (high level of accountability) among government officials avails funds that are used to promote investment for instance provision of subsidies to producers and this leads to production of more goods and services which creates high national income. However, high level of corruption (low level of accountability) among government officials reduces funds available for promoting investment activities and thus fewer goods and services are produced which creates low national income
  1. Size and quality of the labour force. A big number of highly skilled workers is associated with efficiency and high output of goods and services which creates high national income. However, a small and unskilled labour force is associated with inefficiency and low output of goods and services hence low national income.
  1. Market size/ level of demand A large market size encourages investors to produce more goods and services and this creates high national income. However a small market size makes investors to produce few goods and services due to fear of making losses hence leading to low national income.
  1. The level of savings. High level of savings leads to high level of investment which encourages production of more goods and services and this leads to high national income. However low levels of savings lead to low levels of investment and this reduces the amount of goods and services produced which gives rise low national income.
  1. Size of the capital stock.Capital stock of a country includes industrial machines, factories, private and social capital which is used to produce other goods. A large capital stock enables producers to produce more goods and services which create high national income. However, a small capital stock causes low output of goods and services and this brings about low national income.
  1. Level of development of infrastructures. Well-developed infrastructure in form of better roads and communication facilities encourages investors to produce more goods and services which creates high national income. However poor infrastructures in form of poor roads reduce the level of investment and fewer goods and services are produced hence creating low national income.
  1. Level of planning and plan implementation. Proper planning and implementation of projects encourages resource exploitation which increases the level of production of goods and services thereby leading to high national income. However, poor planning and implementation of projects lowers the level of resource exploitation which leads to low productivity hence leading to low national income.
  1. Population growth rate. A high population growth rate increases the dependence burden which reduces the level of savings of the working class and hence low investment and low production of goods and services which creates low national income. However, a low and stable population growth rate increases the level of savings and investment which leads to production of more goods and services which creates high national income.
  1. Economic climate/ rate of inflation. Stable prices encourage producers to invest and produce more goods and services which creates high national income. However, a high rate of inflation discourages producers due increase in the cost of production incurred hence low output of goods and services produced which creates low national income.
  1. The existing land tenure system. Private ownership of land encourages investors to set up economic ventures and more goods and services are produced which creates high national income. However, customary and freehold systems of land ownership discourage investment and thus less goods and services are produced which creates as a small size of national income.
  1. The terms of trade.Favorable terms of trade promote production of more goods and services for export hence leading to high level of national income. However, unfavorable terms of trade discourage production of goods and services for export and this leads to low level of national income.
  1. Attitude of people towards work. Positive attitude towards work by the people enables them to undertake risks and therefore more goods and services are produced which creates high national income. However negative attitude towards work creates laziness among the people and this leads to low output of goods and services which gives rise to low national income.
  1. The degree or level of conservatism. A high degree of conservatism among people limits adoption of new and better methods of production and this leads to low output of goods and services produced which creates low national income. However, a low level of conservatism among people makes it possible for them to adopt new and better methods of production which increases the output of goods and services produced which creates high national income.

STEPS THAT SHOULD BE TAKEN TO INCREASE THE LEVEL OF NATIONAL INCOME IN UGANDA

  1. There should be increase in the level of exploitation of natural resources. The government should encourage more exploitation of natural resources like minerals. This can lead to increase in output of goods and services resulting into increase in national income.
  1. Improve technology. The government should encourage the use of capital intensive technology in order to ensure massive production of goods and services thereby leading to increase in national income.
  1. Labour should be equipped with appropriate/ necessary skills with greater emphasis on specialization. Labour should be trained and given the necessary skills which are in line with Uganda’s development needs. With greater skills, labour force is able to participate in production and produce more goods and services hence an increase in the level of national income.
  1. Improve on infrastructure. The government should improve on infrastructures such as roads so as to increase access to raw materials and market centres. This stimulates investment and leads to production of more goods and services leading to an increase in national income.
  1. Provide investment incentives. The government should provide investment incentives such as subsidies, tax holidays to potential investors. Such incentives attract more investors to Uganda and this leads to production of more goods and services hence increasing the size of national income.
  1. Undertake entrepreneurial training/ man power planning. The government should embark on improving entrepreneurial skills in the country for example through organizing seminars and workshops so as to increase on the number of entrepreneurs who can mobilize and organize factors of production and bear risks. This increases the output of goods and services thereby increasing the size of national income.
  1. Improve economic planning and management. The sectors in the economy should be properly planned for and well managed. This leads to production of more goods and services thereby increasing the size of national income.
  1. Undertake further privatization. The government should encourage private investors to take up most of the collapsing enterprises with the aim of increasing the production of goods and services thereby increasing the size of national income.
  1. Modernization of agriculture. The government should encourage irrigation and the application of modern farm equipments by the farmers. This is aimed at increasing agricultural output thereby leading to an increase in national income.
  1. Expansion of markets both local and foreign should be encouraged. The government should continue with the policy of identifying new markets and expanding on the existing ones. A widened market promotes investment leading to production of more goods and services thereby increasing the size of national income.
  1. Ensure economic stability. The government should ensure economic stability in form of stable prices of goods and services. This is achieved through setting up a maximum price and maintaining it for a reasonable period of time. Stable prices encourage investments leading to production of more goods and services thereby increasing the size of national income.
  1. Ensure political stability. This is aimed at giving confidence to investors thereby making it possible to produce more goods and services hence increasing the size of national income.
  1. Further diversification of the economy should be promoted. This can be done through development of tourism, expansion of industry and the service sector. This can reduce dependence on one economic activity (agriculture). This can result into increased production and increase in national income.
  1. Further trade liberalization can be implemented. This should be done by removing government controls on trade. Therefore producers are able produce more goods and with a large measure of freedom hence increasing national income.

                                   IMPORTANCE OF COMPUTING NATIONAL INCOME

  1. National income figures are useful for economic analysis and planning. National income statistics provide useful information to the government which can be used for current and future economic planning. For example national income figures are used when preparing the national budget and perspective (long term) plans.
  1. It is used to determine the standard of living of the people in a country. Total National Income is divided by the total population in a country to obtain per capita income. Per capita income indicates the level of economic welfare of the people in the country.
  1. It is used to compare welfare in a country over time. (For comparison purposes over time). The per capita income figures of the different years are compared to enable the government identify the year in which peoples’ welfare was better.
  1. National income figures are used to compare the standard of living between countries (for international comparison). National income figures are computed to compare the GDP, GNP or per capita income of different countries. For example the per capita income of Uganda can be compared to that of Kenya to find out whether an average Ugandan is better off than an average Kenyan.
  1. It is used to determine whether an economy is growing, stagnant or declining. If national income increases over time, it means that the economy is growing. If national income remains more or less the same over time, it indicates that the economy is stagnant. If the national income is falling over time, it indicates that the economy is deteriorating. If the economy is growing, the economic growth rate can be determined by measuring the rate of increase in national income.
  1. It is used to show income distribution. National income figures show how income is distributed among the various factors of production and the different sectors of an economy. This helps the government to design appropriate policies to ensure a more equitable distribution of income.
  1. It helps to show the expenditure patterns within a country. National income figures reveal public and private sector expenditure when the expenditure approach is used. For instance it is possible to identify how much money government spends on services like education, health care, transport, defence and security.
  1. It is used to identify the leading and lagging sectors. National income figures show the economic performance of different sectors of an economy. This enables the government to identify the sectors that are growing at a fast rate and those that are growing at a slow rate such that measures are taken to uplift performance in the lagging sectors and at the same time maintain growth of the leading sectors.
  1. It is used to request for foreign aid. Donors always need information about national income so that they can select appropriate sectors that they can give assistance.
  1. National income figures show the extent of dependence in an economy. National income figures assist the government to identify the sectors on which the country largely depends. The sector with the highest contribution to Gross Domestic product (GDP) is the one upon which the country greatly relies.
  1. National income figures are useful when carrying out research. Research scholars of economics make use of data pertaining to a country’s input, output, income, savings, consumption, investment, employment etc which is obtained from net national income and net national expenditure.
  1. National income figures show the level of resource exploitation. A high level of national income indicates increased and better utilisation of a country’s available resources while a low level of national income indicates underutilisation of a country’s available resources.
  1. National income figures are used for taxation purposes.

 

MEASUREMENT OF NATIONAL INCOME

National income is measured using 3 main approaches or methods/approaches.

  • Income approach (Y)
  • Expenditure approach (E)
  • Output/ value added approach (O)

INCOME APPROACH

In this approach, national income is the summation of all factor payments or incomes excluding transfer payments.

NATIONAL INCOME/GDP=SUM W+R+I+P-T P

W=WAGE, I=INTEREST, R=RENT, P=PROFIT, TP= TRANSFER PAYMENTS

Transfer payments are incomes received by individuals where no defect service of goods have been received e.g. pocket money, student allowances, employment allowances etc.

 The problems associated with using this method include;

  1. Inadequate information. Individuals have different sources of income which are not known to the government. Many people are self-employed and are not willing to declare their income in fear of high taxation. As a result, the national income figures in this circumstance are either under estimated or over estimated.
  1. Difficulty in identifying transfer payments. Being non-quid proquo, such payments should be excluded when calculating national income figures otherwise double counting may arise. However, it may not be easy to identify the transfer payments hence a problem of double counting and over estimation of national income figures.
  1. Inability to identify incomes from abroad. Income from employment of labour abroad is in most cases excluded when computing national income figures. This is because it is very difficult to collect such data.
  1. Difficulty in identifying capital gains. Capital assets tend to appreciate in value as a result of an increase in market prices of such assets. Therefore capital gains are received by the owners of such assets but they do not correspond to output of goods and services and therefore they should not be included in national income figures. However, sometimes capital gains are included leading to over estimation of national income.
  1. Difficulty in identifying income from illegal activities. Income got from illegal activities such as prostitution and gambling should not be included in national income figures because it is not got out of productive activities. However in most cases such incomes are not excluded and this leads to over estimation of national income.
  2. Difficulty in identifying income from unpaid for services. Some services are rendered but they are not paid for e.g. family labour, house wife services, etc. Since these services are not paid for and they are productive, national income is underestimated.

EXPENDITURE APPROACH

This method considers the total expenditure incurred on final goods and services produced by firms and individuals during the course of the year.

National income income/GDP= C+I+G+(X-M) where

C= expenditure on consumer goods by house holds.

I= investment expenditure by the firm on fixed capital assets like factories, ware houses, machinery.

G= government expenditure on goods and services.

X-M = net external expenditure (exports- imports).

Problems met in using this approach;

  • Difficulty in distinguishing between final and intermediate expenditure. It is only expenditure on final goods and services that must be included in national income estimation. Expenditure on intermediate goods must be excluded in order to avoid double counting. However, it is difficult to distinguish between expenditure on intermediate goods and final goods. This leads to overestimation of national income figures.
  • Inadequate information. In most cases, it is very hard to obtain information on expenditure especially on personal expenditure, private investment expenditure, government expenditure, etc. This is because many people do not keep records of their expenditure. This leads to underestimation of national income figures.
  • Difficulty in estimating expenditure on imports. These should be excluded from the national income statistics. However, there are many people involved in international trade and it is very hard to get information regarding expenditure on imports. This leads to under estimation or over estimation of national income figures.
  • Difficulty in identifying expenditure on transfer payments. These should be excluded from national income. However, private people and government are not willing to reveal such information.

OUTPUT/VALUE ADDED APPROACH

According to this method, natural income is compiled by summing up all the value added by the production units at each stage of the production process in all the sectors.

Value added refers to the difference between the input value and the output value of a commodity.

Problems associated with this approach.

  • Inadequate information. Under this approach, it is very hard to establish how much has been produced by all enterprises in a given year. This causes either under estimation or over estimation of national income.
  • Difficulty in identifying final and intermediate goods. Only final goods should be considered under the output approach. However, it is not always clear whether the commodity is an intermediate one or final one hence double counting leading to over estimation of national income.
  • Difficulty in identifying inventories in work in progress. These are goods that are produced but not used immediately. Some goods are produced in the course of the year but are sold in the following year. The problem arises whether to include the value of inventories in the current period or in the next period.
  • Difficulty in determining the value of subsistence output. Subsistence output refers to one for the producer’s own consumption (non-marketed output). There is a problem of attaching value to output that does not pass through the market.

 

IDENTICAL RESULTS

Theoretically, the three methods are supposed to yield the same results i.e. O≡E≡Y

The identical results can be illustrated by the circular flow of income and expenditure.

 

THE CIRCULAR FLOW OF INCOME IN A TWO SECTOR – MODEL

(CLOSED ECONOMY/AUTARKY)

The circular flow of income describes how income in a two sector model flows between households and business firms.

The households sector receives income from the business sector in return for the factor services provided.

The business sector receives income from the households sector in return for the goods and services produced.

ASSUMPTIONS OF THE CIRCULAR FLOW OF INCOME

  • There are only two sectors in the economy, that is the households sector (consumers) and business sector (producers).
  • The households sector is the only owner and supplier of factors of production.
  • The business firms are the only producers and suppliers of goods and services.
  • All incomes received by households are spent on buying goods and services produced by the business firms
  • All incomes earned by the business firms are spent on hiring factors of production provided by the households.
  • All output produced by firms is sold in the market.
  • The economy is assumed to be closed
  • There is no government intervention.
  • Technology is assumed to be constant.
  • Tastes and preferences are constant.

Illustration of the circular flow of income in a two – sector model

 

  • The diagram above indicates the two sectors and the interrelationship between them is indicated by the arrows.
  • The household sector supplies factors of production to the business firms as indicated by arrow 1 (flow of productive resources)
  • Arrow 2 shows the supply of goods and services by the business sector to the household sector (flow of commodities).
  • Arrows 1 and 2 thus indicate real flow.
  • Arrow 3 shows the expenditure by business firms on buying the factors of production from the household sector. This arrow represents the factor incomes to the household sector in form of wages, interest, rent and profits.
  • Arrow 4 indicates the payment for goods and services by the household (money is moving from the household sector to the business sector).
  • The receipts obtained by the business sector are equal to what the households have spent on these goods and services. Arrows 3 and 4 indicate monetary flows between households and the business sector.

NOTE

In producing goods and services, business firms employ the services of factors of production supplied by the households. Whatever the firm spends on factor services should be the same as income got from selling goods and services produced using the factors of production thus output is identical income (O≡Y). This is based on the assumption that whatever is produced is sold to the households.

Expenditure by the households should be equal to what they obtain as factor incomes from the business firms thus (E≡Y). This is based on the assumption that whatever is earned by the household as income is spent on purchasing goods and services.

Therefore, it can be concluded that the three approaches of measuring national income (income, expenditure and product approach) should give the same figures unless there are errors in the calculations such as errors of omission.

 

PROBLEMS ENCOUNTERED WHEN COMPILING NATIONAL INCOME DEVELOPING COUNTRIES

The problems encountered when compiling national income can be categorized into two i.e. conceptual and statistical problems.

CONCEPTUAL PROBLEMS

These are problems that arise due to failure among economists to have a uniform or universal understanding of the definition of national income. These problems originate due to failure by economist to agree about what to include or exclude when compiling national income. They include;

  1. Problem of defining the boundary of production. This is concerned with which items to include or exclude when estimating national income. For example should child labour or the service of a house wife be included or excluded when compiling national income? Some activities regarded legal in one country are regarded as illegal in others. Therefore those who compute national income find a problem in selecting the activities to be included or excluded.
  1. Problem of subsistence output (non – marketed output). It is difficult to know which activities to include in subsistence production when estimating national income since there are many small scale firms geographically dispersed that are engaged in production on a subsistence basis.
  1. Problem of unpaid for services. Some services are rendered but they are not paid for example family labour and services of a house wife. Economists find it hard to decide whether such services should be included or not. As a result, such services may be excluded yet they are productive.
  1. Failure to distinguish between intermediate and final output. Only final goods should be considered when compiling national income. However, it is not always clear whether a particular commodity is an intermediate or final one. For example sugar can be used as an intermediate good in the production of sweets as well as a final good for domestic use. As a result, the value of a good or service may be estimated more than once. This leads to double counting hence overestimation of national income.
  1. Problem of illegal activities. Income earned through illegal activities such as gambling, smuggling and prostitution should be excluded when measuring national income. However, it is difficult to identify such incomes and activities considered illegal in one country may be legal in another.
  1. Problem of transfer payments. During the course of the year, some individuals get income without corresponding goods produced or services rendered. These transfer payments should be excluded when measuring national income. However, they are sometimes included because it is difficult to differentiate them.
  1. Problem of timing production. It is very difficult to determine the output produced in the country during a particular year. This is true especially for agricultural output in which it becomes hard whether to consider the time of production or the time of harvesting when estimating national income.
  1. Problem of inventories and work in progress. This basically considers goods that are produced in one accounting period and sold in another accounting period. A problem arises whether to include the value of inventories in the current period or the next period.
  1. Difficulty in choosing the method of measuring national income. Theoretically, the three methods are supposed to yield the same results. However in reality, these methods may not yield the same results especially where the necessary adjustments have not been correctly handled. Therefore those who compute national income statistics find a problem to agree upon the appropriate method to be use.

STATISTICAL PROBLEMS

These are problems to do with the collection and accuracy of national income figures. Here, we focus on challenges that are likely to make national income figures inaccurate or unreliable.

  1. Inadequate statistical data. Developing countries have limited information on incomes, expenditure and output.  This is mainly due to absence of proper record keeping by producers and consumers and unwillingness of people to disclose their incomes and expenditure for many reasons. This leads to misleading national income figures.
  1. Limited skilled manpower. There are few statisticians, economists and accountants with the necessary skills required to compute with accuracy the national income statistics.
  1. Problem of price changes. Where national income is valued at current market prices of goods and services, price changes affect the value of national income. An increase in the general price level of goods and services leads to increase in national income yet actual production might have fallen. On the contrary, a fall in the general price level of goods and services leads to a decrease in national income yet actual production might have increased. Therefore the national income figures computed under conditions of price changes are misleading.
  1. Problem of statistical errors. The process of compiling national income statistics is subject to many errors such as errors of omission and commission which bring about wrong totals of national income figures.
  1. Difficulty in calculating the value of depreciation. As capital assets are used in the production process, they wear out hence a loss in their value. The value of depreciation is subtracted from the total national income to obtain net national income. However, it is difficult to measure with accuracy the value of depreciation since different firms use different methods of calculating this value. Therefore this creates a statistical constraint as countries depend on gross instead of net national income.
  1. Problem of double counting. This refers to estimating the value of an item more than once when compiling national income statistics. This arises due to failure to distinguish between intermediate and final goods and failure to identify transfer payments. This leads to exaggerated national income figures.
  1. Problem of estimating net income from abroad. It is difficult to get information on the incomes earned by nationals working abroad and on incomes of foreigners living within the country. This leads to inaccurate national income figures.
  1. Inadequate facilities and equipments to use, e.g during collecting, organizing, summarizing, analyzing and interpreting data. For example there is shortage of funds and computers required to carry out the exercise successfully.
  2. Difficulty in determining government expenditure. Where the expenditure approach is used, it is difficult to estimate government   expenditure since government provides a number of services like education, health care, transport, police and military services among others.
  1. Problem of valuing subsistence output (non – marketed output). It is difficult to estimate the monetary value of output produced for one’s own consumption since it does not pass through the market.
  1. Problem of valuing inventories and work in progress. All changes in inventories whether positive or negative are included during national income estimation. The value of changes in inventories is added or subtracted from the current production of the firm. However, it is also difficult to value the stock of unsold goods and work in progress when compiling national income statistics.
  2. Problem of valuing unpaid for services. There is difficulty in attaching monetary value to services that are rendered but they are not paid for such as family labour and services of a house wife. As a result, such productive activities are ignored leading to underestimation of national income.

NATIONAL INCOME- UGANDA CASE

UGANDA’S GDP TENDS TO BE LOW BECAUSE OF THE FOLLOWING

  • Few raw materials that cannot be exploited to raise the level of GNP.
  • Low level of technology. This leads to slow production process so not a lot of goods and services are produced.
  • Low capital equipment or little capital equipment machines that make it hard to exploit the available resources fully.
  • The manpower is mostly unskilled with low productivity and efficiency and this limits output at national level.
  • High population growth rate of about 3% per annum deter the savings and capital accumulation as well as investment which would lead to increased output.
  • Poor infrastructure limits access to raw materials sources and increases costs of production and this deters high output levels.
  • Low market/limited trade possibilities both at local and international levels discourage large scale increase in output.
  • Poor terms of trade. The country’s exports are mainly agricultural whose prices on the international scene are ever falling compared to the prices of imports that continually increase and as a result there is limited importation of capital equipment to use in the production process and resource exploitation.
  • Poor political will. There is a lot of embezzlement of funds that would have been invested. The poor policies by the government discourages small private investors and this restricts production and output.
  • Political instabilities diverts funds from productive activities and discourages production.
  • Heavy dependence on nature tends to lead to fluctuations in output as well as income and this discourages production.
  • Uganda tends to use the output approach for national income accounting because;
  • It’s direct and easier to get data using this method
  • It takes into account, the contribution of the subsistence sector which is a big sector in Uganda.

THIS VIDEO IS ABOUT NATIONAL INCOME

 

 

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ASSIGNMENT : NATIONAL INCOME IN ECONOMICS assignment MARKS : 10  DURATION : 1 week, 3 days

 
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