NATIONAL INCOME HAS BEEN CRITICIZED SEVERALLY BASED ON THE FACT THAT IMPORTANT IDEAS DID NOT ENTER INTO THE MEASUREMENT. DISCUSS THE IMPLICATION ON THE STANDARD OF LIVING OF THE PEOPLE.

NATIONAL INCOME HAS BEEN CRITICIZED SEVERALLY BASED ON THE FACT THAT IMPORTANT IDEAS DID NOT ENTER INTO THE MEASUREMENT. DISCUSS THE IMPLICATION ON THE STANDARD OF LIVING OF THE PEOPLE.

 

Introduction

National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country (Wikipedia, 2000)

National income is a very basic concept in macroeconomics about which we should how much output our economy is producing over a given period of time. National income statistics give us much information about how a nation’s economic growth and related objectives such as: quality of life, standard of living of one country compared to another (John & Alison, 2019).

A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted national income also called as NNI at factor cost (NNI) adjusted for natural resource depletion). All are specially concerned with counting the total amount of goods and services produced within the economy and by different sectors. The boundary is usually defined by geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods and services that are counted. For instance, some measures count only goods & services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them.

National income, as known as Gross Domestic Product (GDP), is the money value of total goods and services produced within a country over a twelve-month period. This annual figure is very helpful to the economists to track the economic growth’s rate, average living standard in one country as well as the distribution of income between different groups of population (i.e. inequality gap). Three major components of national income accounts are: output, spending expenditure and income; which respectively represent three methods of measuring GDP.

Major Limitations of National Income

1. First, national in curve figures are not accurate. This is inevitable because measuring the economic activity of an entire country can never be done precisely. People sometimes fail to fill in forms or they complete them inaccurately.
2. The ‘black economy’ distorts the figures. This is the name given to work that is not reported to the authorities.
3. A rise in national income may not mean a rise in living standards. This is because the rise may occur as a result of increased spending on items such as defence, which do not impro­ving living standards. Similarly, an increase in national income may be accompanied by a rise in undesirable externalities, such as pollu­tion, or a fall in the quality of goods.
4. The accounts only measure paid activities. They, therefore, exclude do-it-yourself activities and the work of housewives. If over a period of years there is a rise in such activities, then this will not be shown in the official figures and comparisons over several years will be inaccurate.

In most countries of Africa and Asia, women collect water and wood, people build their own houses and live off food that they have grown. If these unpaid activities are not counted, then the figures will greatly underestimate the level of GNP in these countries.

5. National income often rises in time of war, or the threat of war, because money is spent on weapons. This will push up GNP, but the people may be acutely short of goods to buy.
6. When making comparisons with the past, adjustments have to be made to allow for inflation. Hence it is important when looking at the figures to see whether they are in nominal terms, i.e., the actual figures not adjusted to remove the effects of inflation.

The extent of inflation can be calculated fairly accurately over a short period, such as one year, but it is much more difficult to do so over a long period. One reason is that new products appear and existing ones become obsolete, so it is impossible to measure price rises accurately.

7. Another adjustment that has to be made when making comparisons with the past is that the figures have to be adjusted to allow for population changes. If national income has risen by 10%, but population has also risen by 10%, the average person is no better- off.
8. Many factors affect the quality of life but are excluded from GNP. Over the last few decades, people have come to enjoy more leisure, largely because they work fewer days. The national accounts take no note of this. Similarly, the quality of many products has improved— a modern TV is far superior to one made many years ago.

On the other hand, economic growth may be accompanied by increased pollution, overcrowded cities and a frenetic lifestyle—factors ignored by statisticians. The national income accounts measure some of the quantitative factors affecting life, but they ignore many features of the quality of life.

9. Finally, the figures say nothing about the distribution of income within a country. In some countries a small elite has a large share of the economic cake; in such countries figures showing a high average income per head may give the wrong impression of typical living standards.

Implication of National Income on the standard of living of the people

Firstly, GDP value can be measured by adding up the total final value of goods and services that are manufactured within an economy, industry by industry using the concept is value added. Value added is defined as the increase in the value of a product at each consecutive stage of the production process. The reason for this approach is to avoid the problems of double-counting the value of intermediate inputs. To the best of my knowledge, there are three productive sectors in an economy: primary (agriculture goods), secondary (manufactured goods) and tertiary (services), quaternary (research and development). There has been a strong increase in volume of output in the tertiary sector. The table below illustrates how the recent data has contributed to a structural change in the economy.

As we can see from the table, the gross value added figure of mining and quarrying and manufacturing has observed a continued decline in output from the period of five years (2001-2004) whereas distribution, hotels, catering together with business services were enjoying a strong growth in total production. So far, the largest share of total national output (GDP) comes from our service industries. Noticeably, there have been divergences created between secondary and tertiary sectors of the British economy.

Second, we can also generate national income level by adding up total incomes of each individual household from production in form of wages, salaries, profits, rents and interest. It is important to take notice that only those incomes that are actually generated from production activities count for the GDP calculation. By that we have to exclude: Income that is not registered with the Inland Revenue or Customs and Excise (underground economy earned income), transfer payment from Government (income support, unemployed benefit, state pension).

General speaking, GDP can be regarded as an indicator to measure the size of its economy. When reading national income statistics or making sensible comparison of one year’s to another, we should take into account some factors that might influence the its accuracy. We have to adjust for inflation. For instance, if this year national income has gone 10 per cent higher than last year figure but meanwhile price level has also risen by 10 per cent, then the average person will be no better off at all. Real national income (income after inflation) should increase by a faster rate than that of inflation, hence intriguing a positive economic growth. What about population? GDP per-capita is a basic way of measuring average living standard for the citizens.

UK is a high-income country by international standards, however, its GDP per capita still not at the very and behind some countries like USA which is apparently a strong economy. We have known China – the third largest economy in the world and its currency have been said to likely overtake US dollars.

To some extent, after taking inflation, exchange rates and the size of population, GDP is quite useful in measuring level of income within one nation, provided that we are clear about distinctions of different measures. However, when it comes to living standard or welfare of the inhabitants, it is not necessarily true that we take GDP figure as a perfect key indicator and rely exclusive on it to measure one country’s well-being as it involves many other problems. To understand the relationship between national income and living standards, we define living standards as material welfare of the inhabitant in an economy. The basic measure of the standard of living refers to per capita real GDP. It is found by dividing real GDP by the size of the population (Geoff Riley, Eton College, September 2006)

The underground economy is a big pain that economists might experience when trying to find the precise rate of growth of national income/output. They might either underestimate or overestimate the level of all economic activities taking place every day. The underground economy comprises of illegal and unclaimed transactions. These transactions could be illegal productions/ consumption of illegal goods such as drugs, weapons, prostitution, or sometimes people hide money earned transactions from authorities for high tax purposes and avoid losing benefits. A shop would be more pleased to receive cash from customers in order to avoid VAT. A person does extra evening job but does not declare his income, known as “moonlighting” In this case, the loss of national income from production of output becomes out of control. In addition, using production of output may be a poor indicator to determine nation’s well-being for some reasons. Firstly, because production involves externalities and social costs such as: pollution, problem of global warming, human costs. GDP ignores these external costs and only record the rapid growth in the national statistics. Some production of bad causes also lead to an increase in total expenditure hence raising GDP. More serious crime commitment in the society result in more expenditure on security enforcement, rise in illness will lead to an increase in health care service, so on and so forth. These undesirable effect may literally pull up the GDP. On the other hand, the distribution of disposable income is not considered in GDP when inequality gap problem might arise. GDP per capita of some classes of society probably rise but making others worse-off. By this we mean GDP information is not adequate and reliable enough to determine one nation’s welfare.

Official data on GDP understates the growth of real national income per capita over time due to the shadow economy and the value of unpaid work by volunteers and people caring for their family

The “shadow economy” includes illegal activities such as drug production and distribution, prostitution, theft, fraud and concealed legal activities such as tax evasion on otherwise-legitimate business activities such as un-reported self-employment income

Often official GDP data is inaccurate, e.g. many countries in sub-Saharan Africa do not update their reporting often enough, and so their GDP numbers may miss large and fast-growing sectors, like cell phones.

In 2014 Nigeria became the largest economy in Africa (over-taking South Africa) after a fundamental reassessment of their GDP calculation. GDP data may become a target for political manipulation.