Question

QUESTION THREE a) State the three approaches to measurement of national income. (3 marks) b) Explain any three challenges you would face when collecting and compiling national income statistics. (6 marks) c) Illustrate and explain the income and expenditure model (11 marks)

Answer 1

A). National income is the sum total of income of a Nation. National Income refers to the money value of all the goods and services produced in a country during a financial year. In other words, the final outcome of all the economic activities of the nation during a period of one year, valued in terms of money is called as a National income.

Three are three approaches to the measurement of national income.

1). Income method:- This method approaches national income from distribution side. This method measures national income at the phase of distribution and appears as income paid and received by the individuals of the country. In this method national income is obtained by summing up incomes of all individuals of a country.

2). Expenditure method :- The national income is obtained by adding up all expenditure made on goods and services during a year. Income can be spent either on consumer goods or capital goods. Again expenditure can be made by private individuals, households , business or by the govt.

3). Product Method:- This is also called output method or value added method. In this method the contribution of each enterprise to the generation of flow of goods and services is measured. In this method the econnomy is divided into different industrial sectors as agriculture, mining, construction, trade and commerce, transport, communication and other services. Than the net value of each and every activities is estimated.

2). Challenges faced while calculation of national income:- There are many difficulties and challenges in measuring national income. The few are as:-

Treatment of non monetary transactions:- The first problem relates to the treatment of non monetary transactions such as services of housewife to the family members. The non-monetary transactions are not included in national income.

Treatment of government activities in national income:- The second difficulty arises with regard to the treatment of the govt national income accounts. The general view point is that as regards administrative functions for the government like justice, defense, etc they should be treated as giving rise to final consumption of such services by the community as a whole so that contribution of general govt. Activities will be equal to the amount of wages and salaries paid by the govt.

Treatment of income generated by foreign firm's:-should the income arising out of activities of the foreign firm's include in national income or not is another problem of national income. The IMF holds that the contribution made by foreign firm's should be included in national income but there profits should be credited to parent country.

3). Income and expenditure model or methods of measurement of national income:-

The income method is the method to measure the national income. This method approaches national income from distribution side. In other words, this method measures national income at the phase of distribution and appears as income paid and or received by individuals of the country. Thus, under this method, national income is obtained by summing up of the incomes of all individuals of a country. Individuals earn incomes 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 employees, interest on capital, profits of entrepreneurs (including undistributed corporate profits) and incomes of self-employed people. This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, owners of capital, workers, entrepreneurs.

Expenditure method measures the national income by summing up the expenditure made by business, household, business and govt. Expenditure method arrives at national income by adding up all expenditures made on goods and services during a year. Income can be spent either on consumer goods or capital goods. Again, expenditure can be made by private individuals and households or by government and business enterprises.Further, people of foreign countries spend on the goods and services which a country exports to them. Similarly, people of a country spend on imports of goods and services from other countries. We add up the following types of expenditure by households, government and by productive enterprises to obtain national income.

Hope you got the answer.

Kindly comment for further explanation.

Thanks ?

Stay at home... Stay safe