NATIONAL INCOME

National income is the total monetary value of all final goods and services produced in an economy out of the productive activities in a given period of time usually a year.

From this definition, we note the following;

a)     National income is measured in money terms. However, we are interested in the value of goods produced and not money itself.

b)     Only market prices of final goods and services are considered. This is intended to avoid double counting since production takes many stages before goods reach the final consumer.

c)     We measure both goods and services. Services are also measured because they also satisfaction to consumers.

d)     Income should be derived from goods and services arising out of productive activities. Therefore incomes received for no work done for example pocket money for students, pensions, unemployment benefits, bursaries, gifts from friends and organizations (transfer payments) should be excluded when estimating national income.

e)     National income figures exclude incomes from illegal activities like prostitution and gambling.

f)      National income is measured per period of time thus it is a flow variable and not a stock variable

g)     Incomes should be from transactions of a particular current period. Those arising from periods other than the current period should be excluded. 

CONCEPTS USED IN NATIONAL INCOME

DEFINITIONS OF KEY WORDS

QN

Define the following terms as used in national income.

-         Gross Domestic Product (GDP)

-         Gross National Product (GNP)

-         Net Domestic Product (NDP)

-         Net National Product (NNP)

Solutions

1.     Gross Domestic Product (GDP).

This is the total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year including the value of depreciation.

2.     Gross National Product (GNP)

This is the total monetary value of all final goods and services produced by nationals living within and outside the country in a given period of time usually a year including the value of depreciation.

3.     Net Domestic Product (NDP)

This is the total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year excluding the value of depreciation.

4.     Net National Product (NNP)

This is the total monetary value of all final goods and services produced by nationals living within and outside the country in a given period of time usually a year excluding the value of depreciation.

CATEGORY B

QN

Define the following terms as used in national income.

-         Gross Domestic Product at factor cost (GDPfc)

-         Gross Domestic Product at market price (GDPmp)

-         Gross National Product at factor cost (GNPfc)

-         Gross National Product at market price (GNPmp)

-         Net Domestic Product at factor cost (NDPfc)

-         Net Domestic Product at market price (NDPmp)

-         Net National Product at factor cost (NNPfc)

-         Net National Product at market price (NNPmp)

Solutions

5.     Gross Domestic Product at factor cost (GDPfc)

It refers to total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year including the value of depreciation valued at prices of factors of production, it includes subsidies and excludes indirect taxes.

6.     Gross National Product at market prices (GNPmp)

It refers to the total monetary value of all final goods and services produced by nationals living within and outside the country in a given period of time usually a year including the value of depreciation valued at current market prices of goods and services, it includes indirect taxes and excludes subsidies.

CATEGORY C

QN

Define the following terms as used in national income

-         Nominal income

-         Real income

-         Nominal national income

-         Real national income

-         Nominal Gross Domestic Product (GDP)

-         Real Gross Domestic Product (GDP)

-         Nominal Gross National Product (GNP)

-         Real Gross National Product (GNP)

-         Nominal income per capita

-         Real income per capita

Solutions

7.     Nominal income

This is one’s income expressed in monetary terms

8.     Real income

This is the quantity of goods and services that one’s nominal income can buy.

OR

Real income is the purchasing power of nominal income.

9.     Nominal national income

This is the total monetary value of all final goods and services produced in an economy out of the productive activities in a given period of time usually a year valued at current year prices.

10.     Real national income

This is the total monetary value of all final goods and services produced in an economy out of the productive activities in a given period of time usually a year valued at base year prices.

11.     Nominal Gross Domestic Product (GDP)

This is the total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year including the value of depreciation valued at current year prices

12.     Real Gross Domestic Product (GDP)

This is the total monetary value of all final goods and services produced within the geographical/ territorial boundaries of the country by nationals and foreigners in a given period of time usually a year including the value of depreciation valued at base year prices

13.     Nominal per capita income

This is the average income of the population in a country valued at current year prices

14.     Real per capita income

This is the average income of the population in a country valued at base year prices.

CATEGORY D

15.     Depreciation/ capital consumption

This is the loss in the value of capital assets through wear and tear arising out of their usage in the production process over a given period of time.

16. Depreciation value/ Capital consumption allowance.

This is the amount of money set aside by an entrepreneur to cater for the wear and tear of capital assets of a firm.

17. Personal income.

This is the total income received by individuals in a country from all sources before taxes and other compulsory payments are deducted in a given period of time usually a year.

18. Disposable income.

This is the income available to individuals for spending or saving after personal income taxes and other compulsory payments like NSSF have been deducted.

19. Transfer payments/ transfer income.

Refers to payments made to individuals without corresponding goods and/ or services rendered i.e. they are non-quid proquo payments.

OR

Refers to income received by an economic entity without anything given in return.

Examples of transfer payments in Uganda include;

§     Grants/ donations

§     Old age pension

§     Students pocket money/ upkeep to spouses, relatives, etc

§     Bursaries

§     Sick relief/ benefits/ allowance and other forms of relief

§     Gifts

Sources of transfer payments include:

§     Government. This includes the local, central and foreign governments.

§     Individuals or households.

§     Institutions like business funds and Non-Government Organizations (NGOs).

20. Net income from abroad/ Net property income.

This is the difference between property incomes earned by nationals abroad and property incomes earned by foreigners in the country.

Net income from abroad = Nationals’ earnings (X) – Foreigners’ earnings (M)

21. Per capita income.

This is the average income of the population in a country in a given period of time usually a year.

It is obtained by dividing total national income by the total population.

22.     Income per factor.

This refers to the average income earned by a factor.

NOTE                                           

Determinants of real income in an economy include;

§     The size of nominal income

§     The size of disposable income/ level of taxation

§     The price level/ general price level/ rate of inflation/ cost of living

§     The quantity of goods and services available.

§     The size of the subsistence sector/ monetary sector

ADJUSTMENTS IN NATIONAL INCOME

1.     a)  From Gross to Net, subtract the value of depreciation

b)  From Net to Gross, add the value of depreciation

2.     a)  From Domestic to National, add net income from abroad

b)  From National to Domestic, subtract net income from abroad

3.     a)  From factor cost to market price, add indirect taxes and subtract subsidies

b)  From market price to factor cost, add subsidies add subtract indirect taxes.

Examples

1.     Given GDP, obtain NDP.

2.     Given GNP, obtain NNP.

3.     Given GDPmp, obtain GDPfc.

4.     Given GDPfc, obtain GDPmp.

5.     Given GDP, obtain GNP.

6.     Given GNP, obtain GDP.

7.     Given GNP at factor cost, how would you derive GDP at market price?           (02 marks)

Try

1.     Given Gross Domestic Product at factor cost, what adjustments are required to obtain Net National Product at market prices?                                                              (02 marks)

2.     Given NNPfc, what adjustments would be made to arrive at GDPmp?