Personal income consists of wages, salaries, interest payments received, dividends (i.e. distributed trading surpluses) and the estimated value.of subsistence farming. It is the aggregate income received by households during a given year. This is not to say that national income equals personal income. However, with adjustments to national income, personal income can be determined.
The reason for making adjustments to national income to determine personal income is that corporate income taxes are deducted before the income accrues to the household, some individuals will receive transfer payments from corporations and, or the government although they have produced no good or service.
Furthermore, other individuals receive less than their total earned income since they must make social security contributions to the government or the corporation will pay only a portion of corporate profits to its shareholders. To obtain personal income, then, undistributed corporate profits, corporate income taxes, and contribution to social security must be deducted from national income while dividends, government and business transfers, government and consumer installment interest payments are added.
Disposable Personal Income
When personal taxes are deducted from personal income, we have disposable personal income which is the amount of money households have available for spending. Please note that personal taxes consist of personal income taxes, personal property taxes and inheritance taxes. Also note that, households use disposable income to consume,m save and make interest payments on their debt obligations.
Gross Domestic Product (GDP)
Gross domestic product is the value of all final goods and services produced in the country within a given period. It includes the value of goods produced, such as houses and CDs, and the value of services, such as airplane rides and economists lectures. The output of each of these is valued at the market price, and the values are added together to get GDP.
Gross National Product (GNP)
Gross national product is GDP plus receipts from abroad made as factor payment to domestically owned factors of production and less payments to abroad for factor services owned by foreigners. For instance, part of Nigeria’s GDP corresponds to the profits earned by a Nigerian company from its U.S. manufacturing operations, while part of the GDP is debt service payments for foreign debt.
These profits are part of Nigeria’s GNP, because they are income of Nigerian owned capital while the debt service payments are not.
Real income is national income expressed in terms of a general level of prices of a particular year taken as base. It indicates the real state of the economy.
In order to find out the real income of a country, a particular year is taken as base year when the general price level is neither too high nor too low and the price level for that year is set as 100. Now the general level of prices of the given year for which the national income (real) the general level of prices assessed in accordance with the prices of the bases year. For this purpose the following formula is employed. Real income year t = 100 x Nominal Income year t/Price index for year Suppose 1960 is the base year and the nominal national Income for 1966 is = N = 2000 and the index number for this year is 250. Hence, real national income for 1966 will be:
2000 x 100/250 = N800
Per Capita Income
The average income of the individuals of a country in a particular year is called Per Capita income for that year. This concept also refers to the measuring of income at current prices. For instance, in order to find out the per capita income for 1970, at current prices, the national income of a country is divided by the population of the country in that year.
Per capita income for 1970 = National income for 1970 divided by Population in 1970
Similarly, for the purpose of arriving at the Real Per Capita Income also, this very formula is employed.
Real Per Capita income 1970 = Real National income 1970 divided by Population 1970
This concept enables us to determine the average income and the standard of living of the people. But it is not very reliable, because in every country due to unequal distribution of national income, a major portion of it goes to the richer section of the society and therefore the income received by the common man is much lower than the per capita income
The Purpose of National Income Accounting
There are various reasons why national accounts are needed. One reason is that they provide a comprehensive picture of the structure of the economy, showing how the inhabitants earn their income; how they spend it and what they produce. Comparison of accounts over the years shows clearly the direction in which the economy is moving and the structural changes which are taking place. Thus, it is possible to obtain a dynamic picture as well as a purely static one.
National accounts are also important in the process of economic planning and in the formulation of future policy. In addition, they help in assessing the needs of one country in relation to the needs of other countries. This is essential if economic aid is to be administered judiciously.
The accounts also serve as a basis on which Government budgets can be prepared, and upon which a fair and equitable system of taxation can be built upon. They also provide fuel for formed political debate, and are essential in the development of social services and welfare facilities suited to the particular problems of the country concerned.
The account serves to facilitate international comparisons. The level of GNP or its per capita value has, over the years, been a basis for comparing the standards of living among different countries. The developed countries are identified by a higher level of per capita GPD compared with their less developed counterparts.
The national income account assists investors, both domestic and foreign, in reaching investment decisions. Availability of national income accounts makes it possible for
domestic investors to know and invest in the countries having higher per capita income rather than those with low per capita income in relation to market size. Tied to this, is the fact that the higher the income the higher the demand and investors expected profit.
Difficulties in the Measurement of National Income
The calculation of national income of a country is a complicated one as it is beset with the following difficulties:
The difficulty of defining national’ in national income. Every national has its political boundaries, but in the national income is also included the income earned by the nationals of a country in a foreign country beyond the territorial boundaries of that country.
The Problem whereby some goods and services cannot be assessed in terms by market terms, such as the bringing up of children by the mother and painting as a hobby by an value or in pecuniary terms given that national income is always measured in monetary individual. Since such services are not included in the national income, the national income will work out to be less than what it actually is.
Double counting: This arises from the failure to distinguish properly between final and intermediate products.
The existence of illegal businesses such as the trade in hard drugs, fraudulent practices, money laundering (419), smuggling, and bunkering. These kinds of economic activities generate huge income, which are not usually counted as part of the national income. Yet, the proceeds from these sources are spent in buying goods and services and this also will affect the expenditure records.
Transfer payments present a future problem, which is particularly difficult to resolve. A transfer payment arises when cash is transferred from one person to another without a direct productive service in return. An example of such a payment is a gift (the traditional West African ‘dashy’) to a beggar. In such cases, care must be taken to see that the money concerned is counted as income in the hand of only one out of the two persons concerned. In other words, double counting must be avoided. In a sense all income are transfer, in as much as they are obtained from someone else. But provided some form of productive service is rendered each time they pass from’ hand to hands as indeed they are, for example, when passing between employer and employee or between customer and shopkeeper – it is legitimate to count them as income each time exchange takes place.
Transfer payments often arise where taxation is concerned: for practical considerations, it is usually more convenient here to count the amount when it arrives in the hands of the ultimate recipient, and to deduct it from the income of the original earner. A particularly difficult case arises in connection with the armed services. It is generally agreed that security is essential, and that in rendering these services soldiers are productively employed personnel; it is on these grounds that their pay and allowances are included in national income computations. This, however, leads to the anomaly that in times of war, when a large number of the young people leaves their farms and factories to take up arms, national income tends to increase, despite the fact that everyone is bent upon destruction.
The treatment of depreciation and indirect taxation: Depreciation is the reduction in the value of fixed asset through the normal wear and tear involved in the process of production. This is not a bill that has . to be paid like other expenses, but is obviously something, which has to be allowed for in arriving at the net addition to a country’s wealth resulting from any particular work or project. An indirect tax is one, which is placed upon goods instead of being related directly to the income of the individual. Although, it becomes part of the purchase price of the goods in question, it is not part of he cost of production. In paying the purchase price for goods, which includes an allowance to cover depreciation and indirect taxation, the purchaser is in fact paying more than the basic cost of producing the goods. In order to avoid confusion on this score, the economist distinguishes between output at factor cost, which includes only the basic costs involved in production (i.e. the actual payments to the various factors), and output at market prices, which includes allowances for depreciation and indirect taxation (i.e. the amount which has actually to be paid in the market to acquire the goods.)
• Goods and services are produced by factors of production, from which income is created in an economy. In this case, how would the value of total output be calculated? What needs to be excluded in your calculating procedure and why?
• Given that the sum of capital stock used up (consumed) in producing a given year’s national output (consumption allowances, D) is 100 while the gross private investment (GPI) is 450. What will be the value of Net private domestic investment (NPDI)?
• In the earnings or cost approach, given that depreciation is valued at 250, the value of indirect business . taxes is 80 and the value of national income is 500. Calculate the value of GNP.
• Discuss succinctly the fact that a loaf of bread could be either final or intermediate good.
• The value of total output would be calculated by adding up all the incomes (that is, wages, salaries, interest, rent and profits) of all factors of production, those producing intermediate goods as well as those producing final goods. It is important that in using this procedure to exclude all transfer payments, as these represent nothing more than a redistribution of income from tax payers to the transfer recipients; including them, therefore, would involve double-counting.
• The value of Net private domestic investment equals GPDI (Gross Private Domestic Investment) less capital consumption allowances (depreciation, D) where D, represents the sum of capital stock used up (consumed) in producing a given year’s national output. Thus, Net private domestic investment equals gross private investment (450) minus capital consumption allowances (100) i.e. NPDI=450 – 100. Therefore NPDI = 350.
• The value of GNP is calculated by adding up depreciation, indirect business taxes and national income. In which case, GNP = depreciation plus indirect business. taxes plus national income. Thus GNP = 50+80+500 = 630.
• Certain goods could either be final or intermediate goods, depending upon the purchaser’s use of the good. For example, the loaf of bread is a final good if purchased by a household for consumption; it is an intermediate good if purchased by a luncheonette, who will resell the bread in sandwich form.
In this article, the concepts of national income, national income accounting and circular flow of income were defined. The three methods (product, expenditure, and income methods) of measuring national income were explained. Finally, the purpose and difficulties of measuring national income were discussed.