Meaning of National Income Accounting and Major Concepts
Edited by Paul Elegbeleye and Omotolani Ajileye
Introduction
Every country produces goods and services during a period, usually one year. These goods and services include food, clothing, houses, transportation, education, healthcare, banking, communication, and many others.
Economists need to know how much a country produces, how much income people receive, and how much is spent on goods and services. The system used to measure and record these economic activities is known as national income accounting.
National income accounting helps the government, businesses, and researchers understand the performance of an economy and make economic decisions.
Meaning of National Income Accounting
National income accounting is the systematic process of recording, measuring, and analysing the economic activities of a country over a given period, usually one year.
It involves measuring the total value of goods and services produced, the income earned by individuals and businesses, and the expenditure made on goods and services within an economy. In simple terms, national income accounting helps a country keep track of how much it produces, how much income is generated, and how much is spent.
National income accounting provides important information about the performance and structure of an economy. It helps the government, economists, businesses and researchers understand changes in production, income, expenditure and economic growth.
The information obtained can also be used to compare economic performance across different years, formulate economic policies, prepare development plans and assess changes in the economic wellbeing of the population.
National Income
National income is the total income earned by the factors of production belonging to the residents of a country during a given period, usually one year.
The four main factors of production are:
Land
Land refers to all natural resources used in the production of goods and services. It includes the soil, forests, rivers, minerals, crude oil, natural gas, and other resources provided by nature. Land is important because most economic activities depend on natural resources. The reward for land is rent.Labour
Labour refers to the physical and mental effort people use in producing goods and services. It includes the work of farmers, teachers, doctors, engineers, drivers, traders and factory workers. The quality of labour depends on factors such as education, training, experience and health. The reward for labour is wages and salaries.Capital
Capital refers to man-made resources used to produce other goods and services. Examples include machines, factories, tools, vehicles, computers, and equipment. Capital helps workers produce goods and services more efficiently and in larger quantities. The reward for capital is interest.Entrepreneur
An entrepreneur is a person who combines and organises the other factors of production to produce goods and services. The entrepreneur makes business decisions, introduces new ideas, takes risks, and bears the possibility of making a profit or loss. The reward for entrepreneurship is profit.
Major National Income Concepts or Components
There are several important concepts used in national income accounting.
1. Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within the geographical boundaries of a country during a given period, usually one year. The word “domestic” means that GDP is concerned with production that takes place within the country, regardless of who owns the factors of production.
For example, if a foreign-owned company produces goods in Nigeria, the value of those goods is included in Nigeria's GDP because the production took place within Nigeria. GDP therefore provides an indication of the size and level of economic activity within a country. It is one of the most commonly used measures of economic performance.
2. Gross National Product (GNP)
Gross National Product (GNP) is the total monetary value of all final goods and services produced by the nationals or residents of a country during a given period, usually one year, whether the production takes place within or outside the country.
Unlike GDP, GNP focuses on who owns or earns the income from production rather than where the production takes place. For example, income earned by a Nigerian citizen from a business operated in another country is included in Nigeria's GNP. However, income earned by a foreigner from production in Nigeria is not part of Nigeria's GNP. GNP can be calculated by adding net factor income from abroad to GDP: GNP = GDP + Net Factor Income from Abroad.
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3. Gross National Income (GNI)
Gross National Income (GNI) refers to the total income received by the residents of a country from economic activities carried out both within the country and abroad during a given period. GNI is closely related to GNP because both focus on the income generated by a country's residents or nationals.
It includes income earned by residents from wages, salaries, profits, interest, and other sources, including income received from abroad. GNI is useful for understanding the total income available to the residents of a country rather than simply the value of production that takes place within its borders. International organisations also use GNI in comparing the income levels of different countries.
4. Net Domestic Product (NDP)
Net Domestic Product (NDP) is the value of all final goods and services produced within the geographical boundaries of a country after deducting depreciation from GDP. Depreciation refers to the loss in value of capital goods such as machines, buildings, vehicles, and equipment due to wear and tear, age, or becoming outdated.
The formula is NDP = GDP − Depreciation. For example, if a country's GDP is ₦50 billion and depreciation is ₦5 billion, its NDP will be ₦45 billion. NDP therefore gives a better indication of the value of current domestic production after allowing for the capital goods that have been used up or have lost value during the production process.
5. Net National Product (NNP)
Net National Product (NNP) is the total value of final goods and services produced by the nationals or residents of a country during a given period after deducting depreciation. In other words, NNP takes GNP and removes the value of capital goods that have been consumed or have lost value during production.
The formula is NNP = GNP − Depreciation. For example, if GNP is ₦80 billion and depreciation is ₦8 billion, NNP will be ₦72 billion. NNP is therefore useful because it shows the value of national production after making allowance for the deterioration of capital assets used in production.
6. National Income (NI)
National Income (NI) is the total income earned by the factors of production in a country during a given period, usually one year.
The four main factors of production are land, labour, capital and entrepreneurship, and their respective rewards are rent, wages, interest, and profit. National income can therefore be expressed as the sum of wages and salaries, rent, interest, and profits earned during the period.
For example, if workers receive wages of ₦20 billion, landowners receive ₦5 billion as rent, capital owners receive ₦4 billion as interest and entrepreneurs earn ₦6 billion as profit, national income will be ₦35 billion. National income is important because it provides an indication of the income generated from economic activities in a country.
7. Personal Income
Personal income is the total income actually received by individuals and households from all sources during a given period before the payment of personal direct taxes. It may include wages and salaries, rent, interest, profits, pensions and certain government transfer payments.
Personal income differs from national income because not all income earned in the production process is immediately received by individuals, while some payments received by individuals, such as certain pensions and transfer payments, aren't payments for current production.
Personal income therefore focuses on the amount of income that actually reaches households. It is useful for understanding the income available to individuals before they pay personal taxes.
8. Disposable Income
Disposable income is the amount of income that individuals and households have left after paying direct personal taxes. It is the income that can be used for consumption and saving.
For example, if a person receives a personal income of ₦500,000 and pays ₦50,000 in personal taxes, the person's disposable income is ₦450,000. The formula is Disposable Income = Personal Income − Personal Taxes. Disposable income is important because it gives an indication of the amount of money households can actually use to purchase goods and services or save for future needs.
When disposable income increases, households may have greater ability to increase their consumption and savings.
Summary
National income accounting is the systematic recording and measurement of the economic activities of a country.
It measures production, income, and expenditure over a given period, usually one year.
National income is the total income earned by the factors of production in an economy.
Major National Income Concepts
GDP: Value of final goods and services produced within a country's borders.
GNP: Value of final goods and services produced by a country's nationals, whether at home or abroad.
NDP: GDP minus depreciation.
NNP: GNP minus depreciation.
National Income: Total income earned by factors of production.
Personal Income: Income actually received by individuals and households.
Disposable Income: Personal income after payment of direct taxes.
Per Capita Income: National income divided by population.
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