CHAPTER EIGHT
NATIONAL INCOME
National income refers to value of all goods and services which are produced in a country within a particular year
measured in monetary terms.
This is the total income received by the providers/owners of the factors of production in a given country over a
given time period.
The concept of national income has three interpretations, were by it represents a receipts total, it represents an
expenditure total and the value of production.
Concepts of in national income
a. Gross Domestic Product (GDP). This is the total monetary value of all goods and services produced in a
country during a particular year. Such goods and services must have been produced within the country, and are
purchased for final use/consumption only and not for resale or further processing (intermediate goods). In GDP
the market value of the following production is included; total production of agricultural, mineral, industrial and
miscellaneous services of professional and skilled labor.
b. Net Domestic Product (NDP). This is the GDP less depreciation. Depreciation is the loss in value of the assets
such as machines used in the production of goods and services.
NDP = GDP – Depreciation allowance for capital goods or machinery
c. Gross National Product (GNP). This measures the total monetary value of all the goods and services produced
by the people of a country regardless of whether they in or outside the country. It takes into account exports and
imports. The difference between exports and imports is called net Factor Income from abroad. GNP therefore is
the sum of GDP and net factor income from abroad.
GNP = GDP + Net income from abroad (Exports – Imports)
d. Net National Product (NNP). This recognizes the loss in value of the capital used in the production of goods.
Capital here refers to capital goods. NNP is the difference between Gross National Product (GNP) and the
depreciation.
NNP = GNP – Depreciation allowance for capital goods or machinery
e. Per capita income. This is the average income per head per year in a given country. It is also the national
income divided by the population of the country.
APPROACHES USED IN MEASURING NATIONAL INCOME
1. Expenditure Approach
This method arrives at National income by summing/adding up expenditure on all final goods and services (that
have reached the final stage of production) during a particular year. Such expenditure is divided into:
i. Expenditure on consumer goods ( C)
ii. Expenditure on capital goods (I)
iii. Expenditure by government (G)
iv. Expenditure on net exports (X – M)
Therefore national income (GDP) = C+I+G+(X – M)
Problems associated with expenditure approach
a. Lack of accurate records particularly in the private sector
b. Approximation of expenditure of the subsistence sector
c. Difficulty in differentiating between final expenditure and intermediate expenditure
d. Double counting may exist
e. Fluctuating exchange rates may cause problems in the valuation of imports and exports.
2. Income approach
This method approaches national income from distribution side, were the method measures the national income after
it has been distributed and appears as income earned or received by individuals of the country. Thus according to
this method, national income is obtained by summing up of the income of all individuals of a country. Individuals
earn income by contributing their own services and the services of their property such as land and capital to the
national production. Therefore national income is calculated by adding up the rent of land, wages and salaries of
ECONOMICS COURSE NOTES: CHAPTER 8 – NATIONAL INCOME PREPARED BY MR. ANTONY AMBIA Page 1
, employees, interest on capital, profits of entrepreneurs including undistributed profits of limited companies and
incomes of self-employed people like doctors, lawyers’ teachers and engineers.
National Income (GDP) = W + R + i +
Were; W – wages/salaries R – rental income i – interest from capital – profits
In this method, the national income is arrived at by summing all the money received by those who participate in
the production of goods and services.
Such incomes are in the form of rewards to the production factors (wages, rent, interest and profits).
Public income is also taken into account i.e. it is the income received by the government from its investments
(Parstatals, joint ventures).
Transfer payments are excluded since they represent a redistribution of incomes from those who have earned
them to the recipient’s e.g. National insurance schemes.
Problems related to this method
a. Determination of what proportion of transfer payments constitute in the income of a country.
b. Inaccurate data may exist since business people may not tell the truth about their income in order to evade tax.
c. Price fluctuations may make national income determination difficult.
d. Income from illegal activities is not captured.
e. Valuation of income from subsistence economy may be difficult e.g. housewives.
3. Product Method / Output method
This method approaches national income from the output side. The economy is divided into different sectors such as
agriculture, mining, manufacturing, business, transport and services.
The idea here is to get the sum of the contributions to the production process made by every firm in the economy,
with respect to every commodity produced in the country. This contribution, or value added (V.A), equals the final
value of the product, less the value of all the intermediate inputs (raw materials) used in the country’s production.
Price = V.A. per unit + raw material cost per unit
V.A. per unit = unit Price – raw material cost per unit
Considering a firm/producer in the economy, the value added by it in respect of all commodities it participates in
producing can be calculated with the formular.
V.A. = Gross Sales – Total costs of raw materials used.
Then Gross Domestic Product (GDP) then, is the sum of all values added, by all producers, with respect to all
commodities produced in the economy during the year.
GDP = VA1 + VA2 + VA3 + ………………………. + VAN
That is assuming that there are N producers in the country’ s economy, the GDP is the sum of all total values added
by N producers.
While Gross National Product (GNP) = GDP + net factor income from abroad(FIA)
GNP = GDP + FIA
FIA represents income earnings from abroad less payment to foreigners (import – exports)
In summary gross product is found by adding up net values of all production that has taken place in these sectors
during a given year. In order to arrive at the net value of production of a given industry, the purchases of the
producers of one industry from producers of other industries are deducted from the gross value of the production of
that industry..
The aggregates of net values of production of all industries and other sectors of the economy plus the net income
from abroad gives the Gross national product.
By subtracting the total amount of depreciation from Gross national product to get the Net national product
Uses of National Income Statistics
a. Indicators of standards of living. If the national income is equitably distributed, then the standards of living
will be high.
b. Measuring economic growth. The statistics of one year are compared with previous year to show whether
there is improvement or not.
c. Inter country comparison. They are used to compare the economic welfare among countries hence knowing
which country is better off and by how much. However, the following challenges may be faced when carrying
ECONOMICS COURSE NOTES: CHAPTER 8 – NATIONAL INCOME PREPARED BY MR. ANTONY AMBIA Page 2
NATIONAL INCOME
National income refers to value of all goods and services which are produced in a country within a particular year
measured in monetary terms.
This is the total income received by the providers/owners of the factors of production in a given country over a
given time period.
The concept of national income has three interpretations, were by it represents a receipts total, it represents an
expenditure total and the value of production.
Concepts of in national income
a. Gross Domestic Product (GDP). This is the total monetary value of all goods and services produced in a
country during a particular year. Such goods and services must have been produced within the country, and are
purchased for final use/consumption only and not for resale or further processing (intermediate goods). In GDP
the market value of the following production is included; total production of agricultural, mineral, industrial and
miscellaneous services of professional and skilled labor.
b. Net Domestic Product (NDP). This is the GDP less depreciation. Depreciation is the loss in value of the assets
such as machines used in the production of goods and services.
NDP = GDP – Depreciation allowance for capital goods or machinery
c. Gross National Product (GNP). This measures the total monetary value of all the goods and services produced
by the people of a country regardless of whether they in or outside the country. It takes into account exports and
imports. The difference between exports and imports is called net Factor Income from abroad. GNP therefore is
the sum of GDP and net factor income from abroad.
GNP = GDP + Net income from abroad (Exports – Imports)
d. Net National Product (NNP). This recognizes the loss in value of the capital used in the production of goods.
Capital here refers to capital goods. NNP is the difference between Gross National Product (GNP) and the
depreciation.
NNP = GNP – Depreciation allowance for capital goods or machinery
e. Per capita income. This is the average income per head per year in a given country. It is also the national
income divided by the population of the country.
APPROACHES USED IN MEASURING NATIONAL INCOME
1. Expenditure Approach
This method arrives at National income by summing/adding up expenditure on all final goods and services (that
have reached the final stage of production) during a particular year. Such expenditure is divided into:
i. Expenditure on consumer goods ( C)
ii. Expenditure on capital goods (I)
iii. Expenditure by government (G)
iv. Expenditure on net exports (X – M)
Therefore national income (GDP) = C+I+G+(X – M)
Problems associated with expenditure approach
a. Lack of accurate records particularly in the private sector
b. Approximation of expenditure of the subsistence sector
c. Difficulty in differentiating between final expenditure and intermediate expenditure
d. Double counting may exist
e. Fluctuating exchange rates may cause problems in the valuation of imports and exports.
2. Income approach
This method approaches national income from distribution side, were the method measures the national income after
it has been distributed and appears as income earned or received by individuals of the country. Thus according to
this method, national income is obtained by summing up of the income of all individuals of a country. Individuals
earn income by contributing their own services and the services of their property such as land and capital to the
national production. Therefore national income is calculated by adding up the rent of land, wages and salaries of
ECONOMICS COURSE NOTES: CHAPTER 8 – NATIONAL INCOME PREPARED BY MR. ANTONY AMBIA Page 1
, employees, interest on capital, profits of entrepreneurs including undistributed profits of limited companies and
incomes of self-employed people like doctors, lawyers’ teachers and engineers.
National Income (GDP) = W + R + i +
Were; W – wages/salaries R – rental income i – interest from capital – profits
In this method, the national income is arrived at by summing all the money received by those who participate in
the production of goods and services.
Such incomes are in the form of rewards to the production factors (wages, rent, interest and profits).
Public income is also taken into account i.e. it is the income received by the government from its investments
(Parstatals, joint ventures).
Transfer payments are excluded since they represent a redistribution of incomes from those who have earned
them to the recipient’s e.g. National insurance schemes.
Problems related to this method
a. Determination of what proportion of transfer payments constitute in the income of a country.
b. Inaccurate data may exist since business people may not tell the truth about their income in order to evade tax.
c. Price fluctuations may make national income determination difficult.
d. Income from illegal activities is not captured.
e. Valuation of income from subsistence economy may be difficult e.g. housewives.
3. Product Method / Output method
This method approaches national income from the output side. The economy is divided into different sectors such as
agriculture, mining, manufacturing, business, transport and services.
The idea here is to get the sum of the contributions to the production process made by every firm in the economy,
with respect to every commodity produced in the country. This contribution, or value added (V.A), equals the final
value of the product, less the value of all the intermediate inputs (raw materials) used in the country’s production.
Price = V.A. per unit + raw material cost per unit
V.A. per unit = unit Price – raw material cost per unit
Considering a firm/producer in the economy, the value added by it in respect of all commodities it participates in
producing can be calculated with the formular.
V.A. = Gross Sales – Total costs of raw materials used.
Then Gross Domestic Product (GDP) then, is the sum of all values added, by all producers, with respect to all
commodities produced in the economy during the year.
GDP = VA1 + VA2 + VA3 + ………………………. + VAN
That is assuming that there are N producers in the country’ s economy, the GDP is the sum of all total values added
by N producers.
While Gross National Product (GNP) = GDP + net factor income from abroad(FIA)
GNP = GDP + FIA
FIA represents income earnings from abroad less payment to foreigners (import – exports)
In summary gross product is found by adding up net values of all production that has taken place in these sectors
during a given year. In order to arrive at the net value of production of a given industry, the purchases of the
producers of one industry from producers of other industries are deducted from the gross value of the production of
that industry..
The aggregates of net values of production of all industries and other sectors of the economy plus the net income
from abroad gives the Gross national product.
By subtracting the total amount of depreciation from Gross national product to get the Net national product
Uses of National Income Statistics
a. Indicators of standards of living. If the national income is equitably distributed, then the standards of living
will be high.
b. Measuring economic growth. The statistics of one year are compared with previous year to show whether
there is improvement or not.
c. Inter country comparison. They are used to compare the economic welfare among countries hence knowing
which country is better off and by how much. However, the following challenges may be faced when carrying
ECONOMICS COURSE NOTES: CHAPTER 8 – NATIONAL INCOME PREPARED BY MR. ANTONY AMBIA Page 2
