National income accounting (Part 2)
By Yvonne Harvey, Contributor

HELLO EVERYONE! Last week's lesson looked at the terms 'national income accounting' and 'national income', and then discussed the variants or forms of
national income.

This week's lesson will outline the methods of measuring national income and the uses and limitations of national income statistics.

THE MEASUREMENTS OF NATIONAL INCOME

In order to assess how fast an economy has grown, we must have a means of measuring the value of the nation's output. The measure of national income that we use to do this is known as Gross Domestic Product (GDP). Last week, GDP was defined as the total money value of the final goods and services produced in a country during a one-year period. Remember that this figure does not include goods and services produced by firms abroad that are owned by local individuals or the government. It takes into consideration therefore only what is produced in the country with the resources of the country.

There are THREE methods of measuring GDP. All the three methods should result in the same GDP figure:

* The first method of measuring GDP is to add up the value of all goods and services produced in the country. This is known as the Product/Output Method.

* The second method of measuring GDP is to add up all the incomes in the form of wages and salaries, profit, rent, and interest. This is known as the Incomes Method.

* The third method focuses on the expenditure necessary to purchase the nations production. This is called the Expenditure Method.

Since the value of what is sold is also the value of what is produced and these must be equal to the value of the expenditure, all the three methods must yield the same result, i.e.,

NATIONAL PRODUCT/OUTPUT = NATIONAL INCOME = NATIONAL EXPENDITURE. In reality, however, the figures may differ slightly and the difference is made up by use of an accounting procedure known as the margins of error or statistical discrepancy.

Before we look at the uses and limitations of national income statistics, let us consider the factors that influence national income.

INCOME OF A COUNTRY

The major factor affecting national income of a country is the degree of economic growth. This in turn is influenced by the following:

1. The availability of natural resources and how effectively these natural resources are used by the country ­ The greater the availability of natural resources, and the more effectively they are used, the greater will be the country's economic growth and therefore the greater will be its national income. In Jamaica, our natural resources include bauxite, limestone and sand.

2. The quality of the country's labour force also affects economic growth and ultimately its national income ­ In considering the quality of labour, factors such as size, its health and the skills it has are of utmost importance.

3. The degree of industrial development of the country's industries ­ The more equipped and technically advanced they are, the greater will be the country's economic growth and by virtue of its economic growth, its national income.

4. Economic activity should be spread over a wide range of industries in order to achieve high levels of national income.

5. Political stability is important to economic growth ­ If there is political unrest, investment will be adversely affected and economic objectives will not be achieved.

USE OF INCOME STATISTICS

Now, having compiled the necessary national income statistics, what does a country do with them? We will now look at this and then move on to the limitations in the use of these statistics.

THE USES AND LIMITATIONS OF NATIONAL INCOME STATISTICS

1. The statistics allow us to compare output of one country with another.

2. The figures can be used to compare economic growth of countries at a particular time and over a period of time.

3. The statistics serve as a tool or instrument of economic planning, i.e., the statistics help government to determine how to plan for a country and these plans are included in their budget.

4. One of the most important uses of these statistics is its use in comparing the standard of living of one country with another, i.e., an increase in the National Income statistics usually an increase in standard of living.

However there are a number of limitations in using these statistics as an indicator of standard of living because of:

(a) Problems of measuring national output where there are instances of unrecorded items. This occurs where:

I.There are non-marketed items e.g. babysitting
II. Where underground economies exist.

(b) Total GDP/GNP figures ignore the distribution of income.

(c) Problems in using National Income statistics to measure welfare since:

I. Production does not equal consumption
II. There may be high human costs of production
III. Externalities are ignored. There are costs and benefits to parties external to the production or consumption of a good or service.

(d) National income statistics is recorded in money terms. The value of money is constantly changing and therefore inflation can cause it incorrectly to appear as if a country's national income is increasing. Deflation would have the opposite effect. What is important therefore is the REAL increase in the national income and to arrive at this, allowances must be made for changes in the value of money.

* Yvonne Harvey teaches at Glenmuir High School.