FACTORS THAT DETERMINE THE NATIONAL INCOME OF A COUNTRY
- 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.
- Level of technology: A higher technological development will improve or increase a national income.
- Industrial development: Industrialisation 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 little 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
- Income method (Factor Income Approach): 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 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 (Value-added Approach): 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 the net contributions of the various sectors or enterprises which include individuals, firms and the government. Output method is also called net product or added value method.
- Expenditure method (Purchasers’ Expenditure Approach): 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 the individuals or households, firm and government plus net export. Transfer payments such as pensions paid to retired workers, gift to beggars, etc. are excluded.
Reasons for Measuring National Income
Countries measure their national incomes for various reasons, which include:
- It shows the standard of living: National income gives an indication of the standard of living of the country through the measure of per capita income.
- It determines the growth rate of the economy: National income helps the country to determine the growth rate of the economy.
- Contribution to international organisation: The national income figure determines the country’s contribution to international organisations.
- For comparing standard of living 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 country with that of other countries.
- For economic policies and planning: The national income estimate is vital for economic policy and planning.
- It gives pattern of 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 the economy.
Problems of Computing National Income
The problems that can be encountered in the measurement and compilation of national income in Nigeria include:
- Insufficient technical experts: The technical expertise, which is an essential element for collecting and analysing data, is insufficient.
- Problem of double counting: Some goods can be counted twice and this gives false national income estimates.
- Subsistence production: The predominance in the Nigerian economy of subsistence production, e.g. farming, tailoring, carpentry, etc, makes estimation difficult.
- 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 from abroad: It is very difficult to estimate 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: High level of 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, smuggling make computation of national income very difficult.
Uses of National Income
The uses or importance of national income data or figures include:
- Economic planning: National income provides the basic and comprehensive data on the contribution of various sectors of the economy to national output.
- 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 utilisation 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 the 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 nations.
- Contribution of a nation into international organisations: It equally determines the level of contribution of a nation into international organisations as countries with more per capita income are expected to contribute more than the poor ones.
- For future forecast: The national income data are used to forecast future rate of economic growth and development.
- 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. The international organisations 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
- 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.
- 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.
- Do 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 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.
- 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.