Having examined how income is generated in an economy, we
now proceed to explain the important concepts and terminologies associated with
national income accounting. In particular, we shall be looking at six basic
concepts: Gross national product, Gross domestic product, net national product,
national income, personal income and disposable income.
now proceed to explain the important concepts and terminologies associated with
national income accounting. In particular, we shall be looking at six basic
concepts: Gross national product, Gross domestic product, net national product,
national income, personal income and disposable income.
Gross National
Product (GNP)
Product (GNP)
An important indicator of the economy’s performance and the
general welfare of a nation’s citizens is its annual output of goods and
services, which is often referred to as the economy’s aggregate output. The
gross national product (GNP) is the basic social accounting measure of the
total output of goods services. Simply, GNP is the total market value of all
final goods and services produced by the citizens of a country during some
period of time, say one year (whether they are resident within or outside the
country). It is normally denominated in monetary units, such as the naira or
the dollar. Technically, GNP is gross domestic product (GDP) plus net property
income (NPI) from abroad.
general welfare of a nation’s citizens is its annual output of goods and
services, which is often referred to as the economy’s aggregate output. The
gross national product (GNP) is the basic social accounting measure of the
total output of goods services. Simply, GNP is the total market value of all
final goods and services produced by the citizens of a country during some
period of time, say one year (whether they are resident within or outside the
country). It is normally denominated in monetary units, such as the naira or
the dollar. Technically, GNP is gross domestic product (GDP) plus net property
income (NPI) from abroad.
Gross Domestic
Product (GDP)
Product (GDP)
Gross Domestic Product measures the total output made from
home-based resources, that is, the output produced within the domestic economy.
Exports are explicitly included in the GNP while imports are excluded from it.
The difference between GNP and GDP could be seen from two perspectives. The
first is that some factors of production are located in the home countries that
are owned by foreigners, and hence the income accruing to those factors does
not belong to the citizens of the home country. These incomes or outputs are
usually included in the calculation of GDP but excluded in the measurement of
GNP. Secondly, some citizens of the home country own factors of production
located in other countries, and these factors earn income, which are not
included in the GDP but are included in the calculation of the GNP.
home-based resources, that is, the output produced within the domestic economy.
Exports are explicitly included in the GNP while imports are excluded from it.
The difference between GNP and GDP could be seen from two perspectives. The
first is that some factors of production are located in the home countries that
are owned by foreigners, and hence the income accruing to those factors does
not belong to the citizens of the home country. These incomes or outputs are
usually included in the calculation of GDP but excluded in the measurement of
GNP. Secondly, some citizens of the home country own factors of production
located in other countries, and these factors earn income, which are not
included in the GDP but are included in the calculation of the GNP.
Net National Product
(NNP)
(NNP)
Net National Product (NNP) is simply GNP adjusted for
depreciation. Depreciation is thought of as that portion of the current year’s
GNP, which goes to replace the physical capital consumed or used up in the
process of production. In the course of the year, machines and structures wear
out or are used up as they are employed in the production process. These
machines and structures may also need repairs or replacement. In other words,
most fixed capital depreciates. An estimate of this depreciation (called
capital consumption allowance CCA) is subtracted from GNP to arrive at the net
national product (NNP). Therefore,
depreciation. Depreciation is thought of as that portion of the current year’s
GNP, which goes to replace the physical capital consumed or used up in the
process of production. In the course of the year, machines and structures wear
out or are used up as they are employed in the production process. These
machines and structures may also need repairs or replacement. In other words,
most fixed capital depreciates. An estimate of this depreciation (called
capital consumption allowance CCA) is subtracted from GNP to arrive at the net
national product (NNP). Therefore,
NNP = GNP – CCA (Depreciation)
National Income (NI)
The actual selling prices of goods include sales taxes,
excise taxes, etc. These are referred to by national income statisticians as
indirect business taxes (IBT). Indirect Business Taxes constitute a component
of NNP, which does not reflect the current productive contributions of economic
resources. To have an appropriate measure of total wage, rent, and interest and
profit incomes earned from the production of the year’s output, we must
subtract indirect business taxes from NNP. This gives us the national income
(NI). Thus
excise taxes, etc. These are referred to by national income statisticians as
indirect business taxes (IBT). Indirect Business Taxes constitute a component
of NNP, which does not reflect the current productive contributions of economic
resources. To have an appropriate measure of total wage, rent, and interest and
profit incomes earned from the production of the year’s output, we must
subtract indirect business taxes from NNP. This gives us the national income
(NI). Thus
NI = NNP – IBT.
Personal Income (PI)
Personal income (PI) is indicative of the income supposedly
earned by individuals in the process of creating the GNP. To derive the
personal income from the national income, we subtract those income earned but
not received (such as social security contributions payroll taxes, corporate
income received but not earned. The latter, generally referred to as transfer
payments, are welfare payments such as unemployment compensation, salaries of
pensioners etc.
earned by individuals in the process of creating the GNP. To derive the
personal income from the national income, we subtract those income earned but
not received (such as social security contributions payroll taxes, corporate
income received but not earned. The latter, generally referred to as transfer
payments, are welfare payments such as unemployment compensation, salaries of
pensioners etc.
Disposable Income
(DI)
(DI)
This is the amount actually available to people for
spending. When personal taxes are subtracted from personal income, we arrive at
disposable income (DI). Personal Taxes (PT) consists of personal income taxes,
personal property taxes and inheritance taxes. Thus
spending. When personal taxes are subtracted from personal income, we arrive at
disposable income (DI). Personal Taxes (PT) consists of personal income taxes,
personal property taxes and inheritance taxes. Thus
DDI = PI – PT
We can also define disposable income in terms of the sum of
household’s expenditures on consumption and savings. In other words,
household’s expenditures on consumption and savings. In other words,
DI = C + S
Where C is personal consumption expenditures and S is
personal savings.
personal savings.
Gross National
Product
Product
From our analysis of the circular flow of income and
expenditures, it is obvious there are three ways by which we can measure the
national product of a nation. These are the expenditure approach, income
approach and output approach.
expenditures, it is obvious there are three ways by which we can measure the
national product of a nation. These are the expenditure approach, income
approach and output approach.
Expenditure Approach
Under the expenditure approach, the money expended on the
market value of final output is added up to make up the Gross National Product.
Total expenditure on final output is the sum of four broad categories of
expenditure: consumption investment, government and net exports. Symbolically,
market value of final output is added up to make up the Gross National Product.
Total expenditure on final output is the sum of four broad categories of
expenditure: consumption investment, government and net exports. Symbolically,
GNP = C + I + G + Xn
Where
GNP = Gross National Product
C = Consumption
Expenditure
Expenditure
I = Investment
Expenditure
Expenditure
G = Government Expenditure
Xn =Net Exports.
Net exports of goods and services are the amount by which
foreign expenditures on local goods and services (exports) exceeds local
spending on foreign goods and services (imports), i.e.
foreign expenditures on local goods and services (exports) exceeds local
spending on foreign goods and services (imports), i.e.
Where X = X –
M.
M.
X = Exports
M = Imports.
When X is positive, it means the nation received more from
exports than she spent on imports and when it is negative, the nation spent on
imports than she received from exports.
exports than she spent on imports and when it is negative, the nation spent on
imports than she received from exports.
Note that the expenditure approach to national income
accounting recognizes expenditures on final goods only. Final goods are
finished goods that are ready for use.
accounting recognizes expenditures on final goods only. Final goods are
finished goods that are ready for use.
Income Approach
The income approach seeks to measure the value of total
incomes received within a defined period by those involved in the production of
the goods and services. There are four main components of factors incomes:
wages, rents, interest, and profits. These accrue to labor, land, capital and
entrepreneur respectively. Once we add indirect business taxes and capital
consumption allowances to wages, rents, interests and profits, we get the GNP.
incomes received within a defined period by those involved in the production of
the goods and services. There are four main components of factors incomes:
wages, rents, interest, and profits. These accrue to labor, land, capital and
entrepreneur respectively. Once we add indirect business taxes and capital
consumption allowances to wages, rents, interests and profits, we get the GNP.
Output Approach
Also known as the value-added approach, it seeks to add up
the contributions to final output by every sector in the economy. The emphasis
here is on the value of intermediate products (i.e. the value of products
brought in for the production process from other sectors or industries) must be
subtracted from the value of the final product to arrive at the value added,
i.e., the output by the sector (industry) concerned. It is also possible to
concentrate solely on the value of final goods and services, as is done largely
in the (public) service sector, where the value of all the input costs are
added up to measure the final value of the output. It is easier to do this with
the various sectors of the economy.
the contributions to final output by every sector in the economy. The emphasis
here is on the value of intermediate products (i.e. the value of products
brought in for the production process from other sectors or industries) must be
subtracted from the value of the final product to arrive at the value added,
i.e., the output by the sector (industry) concerned. It is also possible to
concentrate solely on the value of final goods and services, as is done largely
in the (public) service sector, where the value of all the input costs are
added up to measure the final value of the output. It is easier to do this with
the various sectors of the economy.
In fact, this method is commonly used in the economic
literature. To buttress our understanding of the basic concepts used in
national income accounting and the various approaches to national income
measurement, we present in table 4-1 a hypothetical simple national income
account.
literature. To buttress our understanding of the basic concepts used in
national income accounting and the various approaches to national income
measurement, we present in table 4-1 a hypothetical simple national income
account.
Nominal GNP
When final goods and services produced by the economy during
a specified period of time (usually one year) are valued at the price at which
they were actually sold during the year (the current price), we arrive at the
nominal GNP or nominal GDP (depending on which of the two concepts is
relevant). Nominal GNP/GDP is GNP/GDP in current naira value. Hence it is
referred to as money GNP/GDP. Nominal GNP/GDP measurement has one drawback,
viz; it is affected by the price level. Nominal GNP/GDP rises when prices rise,
though there is no increase in actual production. For example, if a liter of
engine oil costN 120 in 2000, while
the cost wasN100 per liter in 1999,
then ten liters will contributeN1, 200
to year 2000’s nominal GNP/GDP but onlyN1,
000 to 1999’s. if we assume that the totalproduction of engine oil was ten
liters and that it constitutes the nation’s only product, then the value of
nominal GNP/GDP has increased fromN1,
000 in 1999 toN1,200 in 2000, whereas
output remained at ten (10) liters. Because of this problem, national income
statisticians have devised an alternative measure that corrects for price
changes: The real GNP/GDP.
a specified period of time (usually one year) are valued at the price at which
they were actually sold during the year (the current price), we arrive at the
nominal GNP or nominal GDP (depending on which of the two concepts is
relevant). Nominal GNP/GDP is GNP/GDP in current naira value. Hence it is
referred to as money GNP/GDP. Nominal GNP/GDP measurement has one drawback,
viz; it is affected by the price level. Nominal GNP/GDP rises when prices rise,
though there is no increase in actual production. For example, if a liter of
engine oil cost
the cost was
then ten liters will contribute
to year 2000’s nominal GNP/GDP but only
000 to 1999’s. if we assume that the totalproduction of engine oil was ten
liters and that it constitutes the nation’s only product, then the value of
nominal GNP/GDP has increased from
000 in 1999 to
output remained at ten (10) liters. Because of this problem, national income
statisticians have devised an alternative measure that corrects for price
changes: The real GNP/GDP.
Hypothetical National Income Account
GNP Gross
National Product 2,
628.8
National Product 2,
628.8
Subtract:
Depreciation 275.5
Depreciation 275.5
NNP Net
National Product 2.353.3
National Product 2.353.3
Subtract:
Indirect Business Taxes 212.5
Indirect Business Taxes 212.5
Business
Transfers 10.5
Transfers 10.5
Other
Transfer 6.2
Transfer 6.2
NI National
Income 2.124.4
Income 2.124.4
Subtract:
Corporate Profits 182.1
Corporate Profits 182.1
(Before
taxes)
taxes)
Social
Security Taxes 203.7
Security Taxes 203.7
Add:
Government Transfer 283.9 Payments Dividends 54.4
Government Transfer 283.9 Payments Dividends 54.4
Net
Interest paid by government 256.6
Interest paid by government 256.6
And
consumer
consumer
Business
Transfer 10.5
Transfer 10.5
PI Personal
Income
2.161.0
Income
2.161.0
Subtract:
Personal Taxes 399.8
Personal Taxes 399.8
DI Disposable
Income
1.7612
Income
1.7612
Subtract:
Personal outlays (consumption)1.350.8
Personal outlays (consumption)1.350.8
PS Personal
Savings 410.4
Savings 410.4
NOMINAL, REAL GNP AND PER CAPITAL INCOME
Real GNP
Real GNP (GDP) otherwise called GNP/GDP in constant naira is
calculated by valuing all output at the prices that prevailed in a particular
year (know as the base year). Therefore, real GNP/GDP is a far better measure
of changes in national production. The technique of employing constant price
measurement makes comparison across time far more meaningful and provides a
measure that is a better indicator of economic performance. In table 4-2, we
illustrate the differences between the nominal and real GNP and how the two
measures can be derived using hypothetical data.
calculated by valuing all output at the prices that prevailed in a particular
year (know as the base year). Therefore, real GNP/GDP is a far better measure
of changes in national production. The technique of employing constant price
measurement makes comparison across time far more meaningful and provides a
measure that is a better indicator of economic performance. In table 4-2, we
illustrate the differences between the nominal and real GNP and how the two
measures can be derived using hypothetical data.
Per Capital Income
(GNP)
(GNP)
GNP/GDP dividend by the total population gives a measure of
how much output there is on the average for each person in the country. This is
called per capital GNP/GDP. Theper capital GNP/GDP concept is introduced to
take into account changes in population size. This is because changes in real
national income may be deceptive if changes in population size have been
significant but have not beensignificant but have not been corrected for.For
example, if GNP over a five-year period rose by 200 percent, the tendency is to
assume that the material well being of the citizens has increased by that
amount. If however, population increased by 300 percent during the same period,
then it is obvious that GNP per capital has fallen over the period, since the
increase in population exceeds the increase in output. Thus, it is necessary to
account for changes in population while measuring national income. Per capital
GNP/GDP or GNP/GDP per capital can be calculated by the formula.
how much output there is on the average for each person in the country. This is
called per capital GNP/GDP. Theper capital GNP/GDP concept is introduced to
take into account changes in population size. This is because changes in real
national income may be deceptive if changes in population size have been
significant but have not beensignificant but have not been corrected for.For
example, if GNP over a five-year period rose by 200 percent, the tendency is to
assume that the material well being of the citizens has increased by that
amount. If however, population increased by 300 percent during the same period,
then it is obvious that GNP per capital has fallen over the period, since the
increase in population exceeds the increase in output. Thus, it is necessary to
account for changes in population while measuring national income. Per capital
GNP/GDP or GNP/GDP per capital can be calculated by the formula.
GNP per capita