(a) Define the concept of “national income”. (b) Briefly explain how national income is measured. (c) Give reasons why it is difficult to compare the national income of...

(a) National income is a measure of the total monetary value of the flow of final goods and services arising from the productive activities of a nation in one year.

(b) National income may be measured n three ways:

(i) The expenditure method.
Through this method national income is arrived at by adding together expenditure on all final goods and services in the economy. This expenditure can be sub-divided into the categories of consumer expenditure, government expenditure, private investment expenditure, exports and imports. The basis of this method is that the value of the commodity is equal to the purchases.

(ii) The income method.
This approach considers the national income as the sum of all incomes earned by factors of production in the economy. Examples of incomes include personal incomes, incomes as benefits, gross trading profits of companies and public corporations and so on. The basis of this method is that the same sum of money will be received as income by the different individuals who contributed to the production of the commodity at some stage.

(iii) The product or value added method.
This is the most direct method of measurement and using this approach national income is found by adding up the value of all final goods and services produced by firms during the year. The basis of this approach is that the value of a given commodity that is sold will have resulted from the value added to it by successive stages of production.

(c) It is difficult to compare the national income of one country with that of another country for the following reasons:

(i) Different countries use different currencies and the exchange rate may not accurately reflect the internal purchasing power of a given currency. In addition, exchange rates in many countries fluctuate considerably especially since floating exchange rate systems are widely used.

(ii) Different countries have different definitions of what is to be included in national income and comparisons should take into account these different definitions. For example, many developed countries exclude the subsistence sector in their measurement of national income but to do so in developing countries would significantly undervalue their national incomes.

(iii) Even though income per capita may be similar among different countries, standards of living may differ considerably because of substantial differences in income distribution. A high national income may, for example, not be well distributed among the population of a given country.

(iv). Different countries have different needs and tastes and so commodities that are valuable in one country may not be valuable in another country. For example, northern countries spend considerably higher sums of money on heating which is unnecessary in tropical countries.

(v) An increase in national income may have come about because of longer working hours or inferior working conditions which may be associated with a decline in the standard of living.

(vi) Differing levels of unemployment among countries make it difficult to establish the net effect on the standard of living.

(d) The level of national income in a country is influenced by demand-side and
supply-side considerations. The level of national income of a country is
influenced fundamentally by the level of injections and withdrawals. Injections
refer to an exogenous addition to the income of firms or households, for example,
in the form of investment, government expenditure and exports. Injections exert
an expansionary pressure on national income and they are magnified through the
actions of the multiplier. The value of the multiplier therefore considerably
influences the level of national income. Withdrawals or leakages refer to any
income that is not passed on in the circular flow of income for example, savings, taxation and imports. Withdrawals are also magnified by the actions of the multiplier and they exert a contractionary pressure on the level of national income. Injections and withdrawals influence the level of national income through their effect on aggregate demand and therefore deal with demand side considerations that influence the level of national income.

The level of national income of a country is, however also influenced by supply-side factors. A vital consideration in this case is the quantity and quality of factors of production available. For example, the existence of a highly skilled labour force will have a positive effect on the level of national income. The existence of vast natural resources such as petroleum and the capacity to exploit than will also have a positive effect on the level of national income. The ability to properly utilize resources also depends on the level of technology available and the institutional framework in a given country.

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Musyoxx answered the question on March 16, 2018 at 17:50