NATIONAL INCOME
RESOURCES:
https://youtu.be/hB0AdeoN5bo
https://youtu.be/x4BDhmODHdI
https://youtu.be/L4-htPwGy8k
Meaning and Measurement
National income means the total value of goods and services produced annually in a country. In
other words, the total amount of income accruing to a country from economic activities in a
year’s time is known as national income. It includes payments made to all resources in the form
of wages, interest, rent and profits.
Concepts of National Income
A. Gross National Product (GNP)
GNP is the total measure of the flow of goods and services at the market value resulting from
current production during a year in a country, including net income from abroad. GNP includes
four types of final goods and services:
1. Consumers goods and services to satisfy the immediate wants of the people,
2. Gross private domestic investment in capital goods consisting of fixed capital formation,
residential construction and inventories of finished and unfinished goods,
3. Goods and services produced by the government, and
4. Net exports of goods and services i.e the difference between value of exports and imports
of goods and services, known as net income from abroad.
Three approaches to GNP
1. Income Approach to GNP
The income approach to GNP consists of the remuneration paid in terms of money to the factors
of production annually in a country. Thus, GNP is the sum total of the following items:
1. Wages and salaries
2. Rents
3. Interest
4. Dividends
© MUYA, Kihumba (2022) 1
, 5. Mixed incomes: These include profits of unincorporated business, self-employed persons
and partnerships.
6. Undistributed corporate profits that’s, Profits which are not distributed by companies.
7. Direct taxes levied on individuals, corporations and other businesses.
8. Indirect taxes: e.g excise duties and sales tax. These taxes are included in the prices of
commodities. But revenue from these goes to the government treasury and not to the
factors of production.
9. Depreciation/Capital consumption allowance: Since this sum also is not a part of the
income received by the factors of production, it is, therefore, also included in the GNP.
10. Net income earned from abroad: This is the difference between the value of exports of
goods and services and the value of imports of goods and services. If this difference is
positive, then it is added to the GNP and if it is negative it is deducted from the GNP.
2. Expenditure approach to GNP
From the expenditure view point, GNP is the sum total expenditure incurred on goods and
services during one year in a country. It includes the following items:
1. Private consumption Expenditure
It includes all types of expenditure on personal consumption by the individuals of a country. It
also the expenditure incurred on services of all kinds like fees for school, doctor, lawyer and
transport. All these are taken as final goods.
2. Gross domestic private investment
Under this comes the expenditure incurred by private enterprise on new investment and on
replacement of old capital. In particular, the increase or decrease the inventory is added to or
subtracted from it. The inventory includes produced but unsold manufactured and semi-
manufactured goods during the year and the stocks of raw material, which have to be accounted
for in GNP. It does not take into account the financial exchange of shares and stocks because
their sale and purchase are not real investment. But depreciation is added.
3. Net foreign investment
It means the difference between exports and imports of export surplus. The difference of value
between exports (X) and imports (M), whether positive or negative, is included in the GNP.
© MUYA, Kihumba (2022) 2
, 4. Government Expenditure on Goods and services
The expenditure incurred by the government on goods and services is a part of the GNP.
However, expenditure on transfer payments is not added, because these payments are not in
exchange for goods and services produced during the current year.
Thus, GNP according to the expenditure method = private consumption expenditure (C) + Gross
Domestic private investment (I) + net foreign investment (X-M) + Government Expenditure on
goods and services (G) = C+I+(X-M) +G.
GNP estimated by either the income or the expenditure method would work out to be the
same, if all the items are correctly calculated.
3. Value Added approach to GNP
The difference between the value of material output and inputs at each stage of production is
called value added. If all such differences are added up for all industries in the economy, we
arrive at the GDP by value added. Its calculation is shown in below;
The table is constructed on the supposition that the entire economy for purposes of total
production consists of three sectors. They are agriculture, manufacturing, and others, consisting
of the tertiary sector.
GDP BY VALUE ADDED
Industry Total output Intermediate Value
purchases added
(1) (2) (3) (4) = (2-3)
a. Agriculture 70 45 25
b. Manufacturing 55 25 30
c. Others 30 10 20
Total 155 80 75
(B) GNP at Market Prices
When we multiply the total output produced in one year by their market prices prevalent during
that year in a country, we get the Gross National Product at market prices. Thus, GNP at market
prices means the gross value of final goods and services produced annually in a country plus net
© MUYA, Kihumba (2022) 3
RESOURCES:
https://youtu.be/hB0AdeoN5bo
https://youtu.be/x4BDhmODHdI
https://youtu.be/L4-htPwGy8k
Meaning and Measurement
National income means the total value of goods and services produced annually in a country. In
other words, the total amount of income accruing to a country from economic activities in a
year’s time is known as national income. It includes payments made to all resources in the form
of wages, interest, rent and profits.
Concepts of National Income
A. Gross National Product (GNP)
GNP is the total measure of the flow of goods and services at the market value resulting from
current production during a year in a country, including net income from abroad. GNP includes
four types of final goods and services:
1. Consumers goods and services to satisfy the immediate wants of the people,
2. Gross private domestic investment in capital goods consisting of fixed capital formation,
residential construction and inventories of finished and unfinished goods,
3. Goods and services produced by the government, and
4. Net exports of goods and services i.e the difference between value of exports and imports
of goods and services, known as net income from abroad.
Three approaches to GNP
1. Income Approach to GNP
The income approach to GNP consists of the remuneration paid in terms of money to the factors
of production annually in a country. Thus, GNP is the sum total of the following items:
1. Wages and salaries
2. Rents
3. Interest
4. Dividends
© MUYA, Kihumba (2022) 1
, 5. Mixed incomes: These include profits of unincorporated business, self-employed persons
and partnerships.
6. Undistributed corporate profits that’s, Profits which are not distributed by companies.
7. Direct taxes levied on individuals, corporations and other businesses.
8. Indirect taxes: e.g excise duties and sales tax. These taxes are included in the prices of
commodities. But revenue from these goes to the government treasury and not to the
factors of production.
9. Depreciation/Capital consumption allowance: Since this sum also is not a part of the
income received by the factors of production, it is, therefore, also included in the GNP.
10. Net income earned from abroad: This is the difference between the value of exports of
goods and services and the value of imports of goods and services. If this difference is
positive, then it is added to the GNP and if it is negative it is deducted from the GNP.
2. Expenditure approach to GNP
From the expenditure view point, GNP is the sum total expenditure incurred on goods and
services during one year in a country. It includes the following items:
1. Private consumption Expenditure
It includes all types of expenditure on personal consumption by the individuals of a country. It
also the expenditure incurred on services of all kinds like fees for school, doctor, lawyer and
transport. All these are taken as final goods.
2. Gross domestic private investment
Under this comes the expenditure incurred by private enterprise on new investment and on
replacement of old capital. In particular, the increase or decrease the inventory is added to or
subtracted from it. The inventory includes produced but unsold manufactured and semi-
manufactured goods during the year and the stocks of raw material, which have to be accounted
for in GNP. It does not take into account the financial exchange of shares and stocks because
their sale and purchase are not real investment. But depreciation is added.
3. Net foreign investment
It means the difference between exports and imports of export surplus. The difference of value
between exports (X) and imports (M), whether positive or negative, is included in the GNP.
© MUYA, Kihumba (2022) 2
, 4. Government Expenditure on Goods and services
The expenditure incurred by the government on goods and services is a part of the GNP.
However, expenditure on transfer payments is not added, because these payments are not in
exchange for goods and services produced during the current year.
Thus, GNP according to the expenditure method = private consumption expenditure (C) + Gross
Domestic private investment (I) + net foreign investment (X-M) + Government Expenditure on
goods and services (G) = C+I+(X-M) +G.
GNP estimated by either the income or the expenditure method would work out to be the
same, if all the items are correctly calculated.
3. Value Added approach to GNP
The difference between the value of material output and inputs at each stage of production is
called value added. If all such differences are added up for all industries in the economy, we
arrive at the GDP by value added. Its calculation is shown in below;
The table is constructed on the supposition that the entire economy for purposes of total
production consists of three sectors. They are agriculture, manufacturing, and others, consisting
of the tertiary sector.
GDP BY VALUE ADDED
Industry Total output Intermediate Value
purchases added
(1) (2) (3) (4) = (2-3)
a. Agriculture 70 45 25
b. Manufacturing 55 25 30
c. Others 30 10 20
Total 155 80 75
(B) GNP at Market Prices
When we multiply the total output produced in one year by their market prices prevalent during
that year in a country, we get the Gross National Product at market prices. Thus, GNP at market
prices means the gross value of final goods and services produced annually in a country plus net
© MUYA, Kihumba (2022) 3
