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Discuss the different approaches used in the measurement of the National Income of a country
There are basically three methods of measuring National Income:
- Income approach
- Expenditure approach
- Output/Value Added approach
1. The Income Approach:
Each time something is produced and sold someone obtains income from those activities/transactions. More precisely, each unit of expenditure will find its way partly into wages/salaries, profits, interest and rents. Income earned for purposes other than rewards for producing goods and providing services are ignored i.e. transfer payments such as unemployment benefits, pension and grants to students, which if included would lead to double counting.
All factor incomes are summed up including the estimated value of earnings in kind (such as the market value of rent-free housing) and subsistence income. These incomes are in the form of employment income (including self employment), profits of private companies and public enterprises, interest on capital and rent on land and buildings.
The sum of these incomes give the Gross Domestic Income (which is an equivalent of Gross Domestic Product). To Gross Domestic Income we add the net property Income from abroad (the difference between what foreigners earn at home and what nationals earn abroad). This gives Gross National Income (GNI) from which capital consumption (depreciation) is deducted to arrive at the Net National Income (NNI).
2. The Expenditure Approach:
This method centers on the component of the final product demand which generates production. It thus measures (GDP) as the sum total expenditure on final goods and services produced/rendered in an economy, and is given the national expenditure equation:
Y ≡ E = C + I + G + (X – m)
where
C: Private consumption expenditure
I: Expenditure investors (Investment expenditure)
G: Government expenditure on goods and services (such as health, education, general administration including Law and Order) provided the government to the public – usually referred to as the public consumption expenditure. This component (G) excludes transfer payments such as unemployment benefits. Instead, its taken as a measure of the value of the services provided the center (including Local Governments), and public
authorities.
(X – M): Expenditure on exports less expenditure on imports and its value is often negative for most developing countries. Under this approach, expenditure on financial assets such as bonds and shares an on second hand goods should be excluded as they do not involve any new output.
3. The output/Value Added Approach:
The most direct method of measurement where output from all sectors (private and public) of an economy is summed up. To avoid double counting, it‟s the value added at each stage of production that is taken into account (i.e. final product). Such sectors include farming, milling, trading; final products include subsistence output which is the output produced and consumed producers themselves, and export output.
The value added approach takes the form of an example of a farmer selling maize to millers at Kshs. 900, millers to traders at Ksh. 1,400 and traders to final consumers at Kshs 1,500, such that the value taken for accounting purposes is given (900 + 500 + 100) = 1,500 which is the same as the price to final consumers.