Methods of estimating national income
Income approach
Expenditure
Output product value added method.
Income approach
National income is measured as a summation of total factor income payment in the course of excluding the transfer payments
(slY= w= wages paid to labour
R1 interest paid ton capital
I- assets paid
R= rent on land
T = profit paid to entrepreneur
P= net property income foreign abroad
This methods presents national income in terms of income earned by factors of production engaged in producing the output.
It is always estimated or calculated at factor cost.
Problems of Income Method
Double counting arises from failure to exclude transfer payments. Measuring depreciation allowance is not easy Difficult to determine the boundary of production. Not easy to income of information on incomes of nationals abroad Difficult to adjust capital gains from genuine incomes.
Expenditure approach
This is the total expenditure incurred, by or final goods and services produced by firms and individuals in a given period of time.
Therefore, using this approach national income equals NY= C+I+G+(X-M)
Where C= consumption expenditure by nationals
I investment expenditure incurred on a new private- investment and replacement i.e. capital G= government expenditure by foreigners on export M= expenditure by nationals on import.
NB. When using this approach, the expenditure considered is only that done on fiscal output. This is done to avoid double counting e.g. expenditure on second hand goods and those on financial assets such as purchase of shares and bonds should be excluded because they only changed hands no new fresh out put is included.
Problems of expenditure method
- Double counting arises due to difficulties in distinguishing between expenditure in final products and intermediate product. Secondly, it is difficult to get determined government expenditure on transfer payments.
- Political stability. Where political stability exists investors gain confidence and will be encouraged to produce more goods and services which leads to a high level of national income. Political instability discourages production hence low level of national income.
- Degree of monetinsation of the economy. The more the economy commercialized or monetinised, the higher is the level of national income compared to one which is subsistence.
- Level of entrepreneur ability. A country with a high quality of entrepreneurship will produce more goods and services hence high level of national income.
- Level of savings and investments. In a country where the level savings in the financial institutions is high, will lead to high level investments, hence high level of national income and vice versa .
- Population Where the rate of population growth is low, the level of nation income will be higher compared to one with a rapid population growth rate
- The political will: Where particular government and politicians economy or participate in the production process, more output will be produced , hence output will be national income.
- The country's access to foreign resources in terms of foreign capital, donations etc will lead to a high level of income.
- Level of cultural development. Countries with modern culture develop faster and therefore high level of national income compared to backward cultures
- Capital stock. Countries with modern firms and greater stock of capital (machinery) produce more goods hence high level of national income compared to national income limited.
- Government action and direction. Where the government allocated resources to productive resources and guide production properly. More goods will be produced hence high level of national income compared to a situation where resources are misallocated.
- Terms of trade. Where the terms of trade are favourable more income will come to the economy and through multiplier effect income will increase further hence a high level of national income.
- General attribute of people towards work. A positive attribute to work will lead to a high level of national income compared to where the attitude towards work is low.
- Volume of injections and withdrawals (leakages ). If the volume of injections are greater than the withdrawals, the level of national income will be high and vice versa.
- Geographical position of a country, countries with a coastline have better trade advantages and their production cost will be lower all the time. The level of national income is higher compared to one which is land locked.