NATIONAL INCOME ACCOUNTING

Senathon Ipia
+234 7052802574

We already know that when factors of production (inputs) are put into the production process, the result is output. Usually, outputs for all sectors of the economy are measured. The aggregation (summing-up) of the measured outputs in the economy of a country gives national output (also known as national product).

National income accounting seeks to measure the market value of final goods and services of a country.

Gross Domestic Product (GDP)  

Gross Domestic Product is the total market value of all final goods and services in a country in a given year.

Analysis of this definition

v     total market value. We add up the naira value of goods and services in Nigeria

v     final goods and services. We only count final products ready to be consumed, NOT products used to make other products. Example, market value of bread will be counted in the GDP; the flour, sugar etc used is not counted separately, to avoid double counting. In the production of bread, flour and sugar are intermediate goods. 

Here is a detailed example of counting final product:

A tree company sells wood to a paper mill for ………….  ₦200

A paper mill sells paper to a textbook publisher for ……... ₦400

The publisher sells the book to a bookstore for …………..₦700

The bookstore sells the book for ………………………...₦1,200

The final product here is the book, and its market value is ₦1,200. So, it is the value of ₦1,200 that is recognized in the GDP, to avoid double counting.

v     produced in a country. Only what is produced within the borders of Nigeria is counted in the GDP. (Remember: the word “domestic” means within a country). So the value of MTN telecom services in Nigeria is counted, even though MTN is not a Nigerian company.

v      in a given  year. This means for one year: Jan – Dec. Nigeria’s fiscal yr is Jan to Dec.

Nominal GDP vs Real GDP  

Nominal GDP is market value of goods and services measured at current year prices.

Real GDP is market value of goods and services measured in a base year price. Your base year is any past year you choose.

Illustration

Given the following illustration on bags on cement and price over a period of years, we analyze nominal GDP and real GDP.

Year     price (₦)      Qty            GDP (₦)

2001        800          50,000        40,000,000
2005      1000          50,000        50,000,000

2009      1500          50,000        75,000,000
2010      1600          50,000        80,000,000
2015      2000          50,000       100,000,000

Nominal GDP is GDP measured at current year prices – the latest year. Here, it is year 2015.

Over the years, the quantity of the product did not increase, but GDP kept increasing. This implies that nominal (current yr) GDP may increase or grow even though the volume or quantity of goods and services has not increased. So growth in GDP may be due to increase in price – inflation.  Where quantity or volume of goods/services produced does not change, then real GDP would not change. So real growth in GDP occurs when quantity or volume of goods/services increase.     

GDP Deflator (GDP Price Index)  

The GDP deflator is used to determine percentage change in GDP from year to year.

The formula for GDP deflator is:

            Current year  x 100

             Base year

                           OR

Current yr GDP – Base yr GDP    X 100

                  Base yr           

From our illustration, using year 2010 as our base, GDP deflator =

  GDP for 2015 [Current year]  x 100

  GDP for 2010 [Base year]

          100,000,000  x 100     = 125%

           80,000,0000

Since there was no increase in quantity, this deflator tells us that there is 25% inflation from the base year to the current year. A deflator of 100% shows NO inflation. And deflator of less than 100% indicates deflation.    

National Income

National income is the value of final goods and services produced in a country in a year. It is the same as GDP.

Note: “Value as used here is the same as monetary value”. 

Economic Growth

Economic growth is increase in GDP or increase in national income.

(Remember: GDP is national output of goods and services, and when the national output is expressed in monetary terms, we have national income).

Economic Recession

Economic recession is two consecutive quarters (i.e. six months) of negative economic growth. If economic growth is a function of GDP, that is, output of goods/services, then negative economic growth is decline in production of goods/services.

Features of Recession:

- decline in production of goods and services

- increase in unemployment: since production has declined, some people become jobless

- fall in real income

Note:

Real income means the value of money, that is, the purchasing power of money. It is inflation that reduces the value of money. If one’s income increases by 5% in a year and the inflation rate in the year is 3%, then the increase in real income is 2%.   

Stagflation

Stagflation is when economic growth is stagnant or low and prices are rising.  

Measuring National Income (or GDP)

There are three (3) methods of measuring national income, namely:

1.         income method (income approach)

2.         expenditure method (expenditure approach) 

3.         product method (output approach)

Income Approach

Under this method, national income is measured as flow of income from factors of production. Land gets rent as income; labour gets wages & salaries; capital gets interest and entrepreneur gets profit.

Note: Income received but not in exchange for any good or service is referred to as transfer payment. Gifts and donations are transfer payments – it is not included in the national income. Example is student’s pocket money.

Income from the four factors of production is referred to as factor income.

Personal consumption Depreciation Wages Business taxes Interest  Investment Govt. expenditure Rental income Corporate profit Exports Proprietor’s profit Imports

₦ billion        3,059      525   5,568      500      645      962  3, 197       54     443    865    578    795

  

GDP or national income = wages + rents + interest + (corporate profits+ proprietor’s profits)

GDP or national income = 5,568 + 54 + 645 + (443 + 578)

                                        = 5,568 + 54 + 645 + 1,021 = ₦7,288

Expenditure Approach

This is the sum of all expenditure on goods and services by all sectors of the economy. These expenditures are:

Ø      consumption: expenditure by household

Ø      investment: expenditure of businesses on plants, equipment, stock, etc  

Ø      government spending: Federal, State and Local govt expenditure on the purchase

            of goods and payment for services, including salaries of govt workers.

  

Ø    net exports: net exports is exports minus imports

So, we have:

GDP or y = household consumption + investment by firms + govt spending + (exports – imports)    

Symbolically, this is shown as: GDP or y = C + I + G (Ex – Im)

GDP or y = 3,059 + 962 + 3,197 + (865 – 795)

                = 3,059 + 962 + 3,197 + 70 = ₦7,288

Output Approach (or Product Method)

Under this method, GDP is measured as the market value of final goods and services. Examples of final goods are bread, cement, plastic, cup, bucket, etc.

The output method uses value-addition approach. This is to avoid the problem of double counting.

Note: The 3 methods should give the same answer.

Therefore, GDP = national income = national output= aggregate expenditure     

Gross National Product

This measures the final goods and services produced by the citizens of a country both at home and abroad and their businesses both at home and abroad.

This means that the economic activities of a Nigerian national (citizen) working abroad is counted in Nigeria’s GNP and not in GDP. The economic activities of a Chinese man and a Chinese business in Nigeria are not counted in Nigeria’s GNP but in GDP.

Therefore, Nigeria’s GNP implies what Nigerian nationals (citizens) all over the world have produced in a particular year.

The difference between GDP and GNP is called net foreign factor income.

   

That is, GDP – GNP = net foreign factor income

Note that: Net foreign factor income = income received by Nigerians and their businesses from abroad minus income paid to foreigners and their businesses in Nigeria.

Net National Product (NNP)

Net national product is gross national product minus capital depreciation. In national income accounting, the term net is used to mean that a value excludes depreciation. 

That is, NNP = GNP – Depreciation

(Depreciation is usually about 10% of GNP).

Hint: The word ‘net’ in any monetary matter means ‘after deduction’. Hence depreciation is subtracted from GNP to get NNP.

Per capita GDP or Per capita income

Per capita income = GDP/ total population of the country (both citizens & foreigners) 

                                           OR

Per capita income = GNP/ total population of the country (citizens only)

Since per capita income is obtained from GDP (or national income) , increase in per capita income is Economic Growth.  

What National Income (or GDP) Measures

1.         Size of the economy: A higher GDP means a bigger economy

2.         Economic growth: GDP is usually measured year by year. If the GDP of a current year increased by, say, 8%, then the economy recorded a growth of 8% compared to previous year.  

3.         Per capita income: This is the average income per person in a country. Remember, per capita income = GDP/total population of a country.

4.         Level of production (output): National income is output expressed in monetary terms. 

           

5.         Business profits/business performance: using the factor income method, national income accounting measures the profit, which is the performance, of business organizations.

6.         Income of households and goods/services they consume:  national income also measures income earned by households (individuals) and the types and nature of goods/services they like to spend their income on.

7.         Government spending on goods/services and the pattern and direction of such expenditures.       

What National Income (or GDP) DOES NOT Measure

1.         Equitable distribution of income and wealth: GDP does not tell whether income & wealth is equally or evenly distributed in the country. Some citizens’ income does not increase despite a rise in GDP.

2.         Goods/services exchanged based on the barter system of trade: if the exchange of goods/services does not involve money it cannot be measured.

3.         Goods/services not paid for: when you hire a house help, you pay and it is included in the national income calculation. But when you carry out the house chores yourself, you do not pay yourself, so it is not included in the national income calculation.

2.         Underground economy (black market): transaction of banned substances is illegal. These illegal activities include sale of Indian hemp (marijuana), cocaine, etc. These illegal economic activities are referred to as underground economy, because they are not carried out in the open market. 

Uses of National Income Statistics (Data)

1.         Economic planning: data obtained from national income accounting is used for planning by government, and even business firms. 

2.         To measure level of economic growth of a country: national income data or statistics is used to determine whether the economy is growing or not, and by how far.

3.         To measure the standard of living: standard of living is how much a person or people enjoy the good things (material things) of life. High national income would mean the people of a country have high level of income and can afford plenty of material things.

4.         To identify the contribution of each sector to the economy of a country

5.         Comparison between countries: GDP is used to compare the performance of the economy of difference countries.

6.         To see government expenditure pattern

7.         To identity areas of the economy that needs government intervention.

8.         It is used to attract foreign investors to the country. Since GDP measures the economic performance of a country, potential foreign investors use the GDP to analyze whether their investment in a foreign country would yield interest.

9.         It is used to determine the contribution of a country to international organizations, such UN, AU, ECOWAS, AfDB, etc.

10.       It is an index for classification of nations into developed or developing nations. If the per capita income of a country is greater than USD 18,000, the country is considered an industrially advanced country (developed country), whereas those countries with per capita income lower than USD 2,000 are considered as less developed countries.            

Characteristics of Developing Countries

1.         High dependence on agriculture and natural resources

2.         Low level of technology        

3.         Low real per capita income i.e. real income per head

4.         Low level of healthcare delivery

5.         High level of illiteracy

6.         Inadequate and poor quality housing

7.         Low level of infrastructure

8.         Low level of industrialization

 Economic Growth vs Economic Development

Economic growth is increase in real GDP or national income

                                          OR

Economic growth is the rise in the money value of goods and services produced in a country in a year.

Factors Affecting Economic Growth in Developing Countries

1.         Level of infrastructural development: with more infrastructure more goods/services can be produced resulting in economic growth

2.         Labour productivity: output increases with more productivity

3.         Flow of foreign aid: when a country receives foreign aid, it gets more capital, whether money capital or physical capital, which is employed in production of more goods/services, resulting in economic growth.

4.         Level of foreign direct investment (FDI): This refers to businesses owned by foreigners in your country. More FDI’s in your country would mean more production of goods/services, leading to economic growth.     

5.         Level of savings and investment: higher savings can fund more investment, helping economic growth.   

Economic Development

Economic development is economic growth and improvement in all area of life of a country or people, such as improvement in technology, infrastructure, industrialization, literacy level, healthcare, etc.

                                    OR

  Economic development is economic growth plus structural transformation of all indices of development.

Measure of Economic Development

1.         Real per capita income i.e. real income per head

2.         Life expectancy

3.         Level of healthcare delivery

4.         Level of literacy and education standards

5.         Quality and availability of housing

6.         Level of infrastructure

7.         Level of industrialization