National Income - Business Studies Form 3
People in a given country normally engage in activities that involve production of goods and services. The government collects data on legal production activities to determine the national income of a country.
National income therefore refers to the total value of goods and services produced legally in a country over a given period of time usually one year.
A country's desire is to determine the value of legally produced goods and services in a given period of time.This will help in proper planning and fair allocation of resources to different sectors of the economy.
The following are some activities that people engage in inorder to earn income in an economy.
MEANING OF NATIONAL INCOME
National income refers to the total value of all goods and services produced in a country over a given period of time, usually one year. It is the total income received by owners of factors of production in a given country in a given period of time.The following illustration shows the factors of production and their relevant rewards which constitute the national income.
THE CIRCULAR FLOW OF NATIONAL INCOME
Circular flow of income refers to the flow of money in the economy to and from the various sectors of an economy such as households, firms,government, among others.The circular flow may include:
A TWO SECTOR ECONOMY
This involves the flow of income to and from households and firms.
Households supply factors of production to the firms who in turn use them to produce goods and services.The firms pay the households for the factors of production availed to them.The households use income received to buy the goods and services produced by the firms.The firms use the income received to buy more factors of production from the households.The following diagram illustrates circular flow of income in a two sector economy.
FOUR SECTOR ECONOMY
This involves the circulation of income in four sectors of an economy which includes households, firms, government and international trade.In this case, part of the demand of goods and services is satisfied by imports.The government receives taxes from firms and households which in turn are used to buy goods and services from firms.
Households keep part of their income as savings which is borrowed by firms for investment.Firms produce goods and services which they sell to households,government while the rest is exported.The following diagram illustrates circular flow of income in a four sector economy.
This approach involves all incomes summation of all the rewards of all production in a given year.It excludes transfer payments and income earned by foreigners in the country.
National income by this approach includes:
It involves summing up the total value of goods and services from all firms in every sector of the economy over a given period of time [usually one year.] It includes final goods and services produced in all sectors of the economy. Products included in the output approach include;
- Value of goods still in the process of production
- Value of government final output of goods and services for example security, education and medical care
- Net output from outside the country [exports less imports].
This involves summing up of all expenses on goods and services used by consumers, the government, the purchase of capital goods by the firms over a specific period of time. It includes;
Consumer expenditure on goods and services
- Expenditure by producers on fixed capital assets [investment goods]
- Government expenditure on goods and services
- Net expenditure from abroad [expenditure on exports less expenditure on imports]
PROBLEMS IN MEASURING NATIONAL INCOME
DEPRECIATION;It is not easy to estimate the actual amount of depreciation of capital in a given year.
- SUBSISTENCE OUTPUT;It is difficult to approximate the value of subsistence output because there is no exchange for them.
- FREE OR SUBSDIZED GOODS OR SERVICES ;This includes unpaid services,subsidized government services, among others.These services give the wrong impression of their market value.
- ILLEGAL GOODS AND SERVICES; Activities that are considered illegal such as making illicit brew and selling of illegal drugs are not included in the national income although they involve some exchange of money.
- PRICE FLUCTUATION; Prices of goods and services in the market keep on changing,making it difficult to estimate the cost.
FACTORS INFLUENCING THE LEVEL OF NATIONAL INCOME
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